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[This blog by my colleague Dr Brett Williams is based on his research for our project, 'Fostering a Common Culture in Cross-Border Dispute Resolution: Australia, Japan and the Asia-Pacific', supported by the Commonwealth through the Australia-Japan Foundation which is part of the Department of Foreign Affairs and Trade.]

As part of this project on possible dispute settlement provisions that could be incorporated into an Australia Japan Free Trade Agreement, Dr Brett Williams is working on papers suggesting two innovations that could be incorporated into the provisions for inter-state dispute resolution regarding alleged violations of market access commitments. Both of these innovations would enhance the transparency of the issues at stake in the potential dispute, and potentially promote earlier and more cost-effective dispute resolution.

One important further aspect of both of these possible innovations would be that they would be capable of being incorporated into the WTO dispute settlement procedure. Both Australia and Japan have long traditions of support for the multilateral trading system and both have a keen interest in being active players in enhancing and improving the system. Therefore, in suggesting these innovations for possible incorporation into an Australia Japan FTA, Dr Williams also considers whether Australia and Japan could use the FTA as a way of trialling some procedures which could later be the subject of a joint proposal by Japan and Australia to amend the WTO dispute settlement procedure. Neither of the proposed innovations are particularly contentious in their concept but there could be some contention about the practical aspects of implementing them.

Paper No 1 – Measuring the Economic Welfare of a Measure Alleged to Violate the FTA as an Elective Step in Dispute Settlement

Government measures may be subject to analysis in various ways. In either Australia or Japan, analysis by academics, by business interests or community interest groups, or by government departments may attempt to quantify the costs in terms of economic welfare of particular policies. In Japan, a special role is played by the Research Institute of Economy Trade and Industry and in Australia by the Productivity Commission. Policies in both countries can be the subject of OECD reports, some of which may measure the size of welfare losses arising form particular policies or more commonly may contain estimates of wealth transfers arising from particular policies (as Producer or Consumer Subsidy equivalents).

The Trade Policy Review Mechanism of the World Trade Organization plays a useful role in transparency by publishing reports which set out a Member State’s legal regulation relevant to the fulfilment of its obligations relating to trade in goods, trade in services and protection of intellectual property. However, the TPRM reports do not attempt to assess the economic consequences of that legal regulation and leave that task to others. However, there have been suggestions that the TPRM process could also produce public reports assessing the welfare costs of certain policies. The argument is that transparency is a step toward policy reform because making the economic cost more transparent would increase political opposition to the policy or to its existing form within the Member State.

Dr Williams is working on a proposal that an Australia Japan FTA could include a mechanism under which either party to a dispute could trigger a study of the economic welfare costs of the measure which is the subject of the dispute. The mechanism could involve referral of the task to an expert or expert group. The report on the economic welfare cost would be both submitted to the governments to consider and critically also made public. Of course, either government or in fact anybody would be free to contest the published findings by publishing their own analysis. The publication of the report, even if contentious, might stir a public debate about the continuance of the measure which might lead to the Respondent government finding that it has political support for changing the measure. The Complainant country could still continue through the steps of the dispute settlement process but it might find that the enhancement of transparency makes it desirable to allow some more time for the internal political debate within the Respondent country to continue. For guidance and inspiration, we are reviewing the literature which points out the shortcomings of the TPRM and contributes suggestions for its improvement.

The major challenge is to design a procedure for the FTA that would work in practice, and which would be the model for similar mechanism being incorporated into the WTO system.

Paper No 2 – Allowing Either Party to Elect to Obtain a Pre-estimate of the Level of Permissible Retaliation that the Respondent Country Might Face

Virtually all trade agreements have dispute settlement provisions containing the same steps. A panel or arbitral body or tribunal makes a decision on whether a Respondent party’s measure is inconsistent with their obligations under the Agreement. Then if the Respondent does not remove the violation, the Complainant may be able to withdraw some obligations which it would have otherwise have owed to the Respondent. Usually the trade agreement specifies that there be some measure of equivalence between the trade effect of the violation and the trade effect of the retaliatory suspension of obligations. This is commonly expressed in terms of equivalence but sometimes in terms of appropriateness. In some agreements but not others there is an additional separate step in the dispute settlement process in which an independent body (tribunal or panel) may be drawn into the dispute again in order to decide on what level of retaliatory suspension is permissible according to whatever test exists in the particular trade agreement.

In political terms, the effect of this is that while the Respondent government, by violating its market access commitment and granting some protection, has gained some political support from the local industry, the effect of the retaliatory response on certain exporters within the Respondent country will cause them to manifest their displeasure with the government’s actions. Very, very few disputes in a bilateral trade agreement will reach the stage of retaliatory responses because either the Respondent will comply in order to protect the good relationship or the parties may reach some kind of accord. However, the ultimate conclusion of the dispute settlement process is to put a violating government in a position in which it has to choose between removing the illegal measures and maintaining the illegal measure and the political support of the local industry but along with the political opposition from a group of affected exporters.

Dr Williams is working on a proposal to crystallize this decision of the Respondent government and the costs and benefits which it must weight up at an earlier stage of the dispute settlement procedure. What if the Complainant could elect to refer to an arbitrator or advisory expert a question like: “If I am right that this measure is illegal, how much trade is affected and how much trade could I block with my retaliation?”. Faced with an estimate of the retaliation that they might face, would the Respondent government still run the dispute settlement process through all the usual steps or might it choose to remove the measure alleged to be in violation? Would such a mechanism be feasible? Who would pay for the report and would it be purely advisory? Upon what basis would they define the extent of permissible retaliation? How would the question be stated for the arbitrator or expert? Would the report be public? These are some of the aspects of this potential innovation that are being considered. So far, we have reviewed the dispute settlement procedures in all of the FTAs entered into by either Japan or by Australia and in some other important bilateral agreements concluded by other countries. Again, we hope to set out a procedure for an Australia Japan FTA which could be a model for a joint Japan – Australia proposal at the WTO level.

© Brett Williams 2011

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Japanese Law in Asia-Pacific Socio-Economic Context
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