Antigua’s WTO-Authorized Retaliation Against U.S. Copyrights

Without getting into the details of the case at all, Antigua prevailed in a WTO case against the U.S.  The U.S. has refused to implement the WTO’s ruling.  As a result, Antigua is permitted to implement retaliatory measures.  It has threatened to do so by permitting violations of U.S. copyrights.  There have been a host of reactions to Antigua’s proposed/authorized suspension of these IP protections. 

Some have suggested that the WTO’s approach is absurd, likening “authorized retaliation” to a two-wrongs-make-a-right mentality (see, e.g., here).  First of all, though, cross-retaliation is not rare in the WTO.  Many countries, including the U.S., have resorted to WTO-sanctioned retaliation when they prevailed in a WTO suit and the other party failed to satisfactorily implement the Appellate Body’s ruling.  The U.S. itself has done it before, and will do it again.  In fact, ironically, U.S. negotiators were among those initially pushing for cross-retaliation as a potential avenue for recourse (see here).

In any case, I think the anti-retaliation point of view often doesn’t fully appreciate the role of measured retaliation.  Sure, it seems silly to “allow” one country to breach an international obligation because another has, but at least the conflict can be reasonably contained.  By letting the WTO determine the amount of retaliation that is appropriate (i.e., an economic value commensurate with the economic disruption caused by the offending measure) we are more likely to avoid having a situation where domestic forces end up creating a trade war.  I’d rather have a WTO body determine the appropriate level of retaliation than a bunch of parliamentarians.

Even if you’re on board with the principle of authorized retaliation, you might also critique Antigua’s proposal because it specifically targets IP protection.  Not surprisingly, the Int’l Intellectual Property Alliance is not a fan.  ("We are of the firm view that suspending intellectual property rights is not the right solution, and that state-sanctioned theft is an affront to any society”)  See here.  I think there are a couple arguments to make on this.   First, it has long been argued that maybe IP protection should be separated from trade policy – that is, placed outside the purview of the WTO and trade agreements.  A lot of people opposed the TRIPS agreement on these grounds.  I am sympathetic to these arguments, but don’t see how the U.S. can really take this position now.  It was, after all, the U.S. that fought so hard for IP to be part of the WTO regime in the first place.  Having won that battle, I think it'd be tough to contend that TRIPS obligations are not fair game for retaliation.  

Another argument, however, may carry some more weight.  What if Antigua’s suspension of IP protection for U.S. copyrights violates another one of Antigua’s international commitments?  Commitments outside the context of TRIPS or the WTO.  The opposition party in Antigua seems to be concerned with this (here).  The opposition leader warned that “Antigua & Barbuda has copyright obligations by binding international treaties apart from the WTO.  Among the binding obligations to respect and uphold copyright are those under the World Intellectual Property Organization.”*  That's interesting.  Should it be required that any retaliatory measure chosen be consistent with these non-WTO-obligations?  I.e., should the WTO take this into account when determining whether proposed retaliation is appropriate?

As a side note, it is also worth considering whether this particular form of retaliation is the most useful option for Antigua.  On the one hand, it wants to punish key U.S. industries to encourage compliance with the WTO decision.  On the other hand, it could probably use its victory at the WTO to get some other form of compensation from the U.S.  But, in the end, this calculation should be made by the government of Antigua.  The WTO's authorization makes this possible, and in my view that's a good thing.

 

*And its not like the opposition leader is some kind of U.S. apologist – it was his Labour party that brought/prosecuted the subject case before the WTO.

New Study on Domestic Trade Politics Studies Domestic Trade Politics

I like to complain a lot. A recent example was this little tirade about how IR/IPE academics don't do domestic politics very well, partially because we tend not to read much work done by other academics who specialize in domestic politics.

Well, this study (in the new International Organization) looks like an improvement over the norm:

A Referendum on Trade Theory: Voting on Free Trade in Costa Rica 

Robert Urbatsch 

Iowa State University, Ames. E-mail: rurbat@iastate.edu 

Abstract 

Research on mass opinion in international political economy overwhelmingly relies on survey data. This poses problems of external validity, especially for a frequently low-salience issue such as trade policy. To examine whether survey findings about attitudes toward economic openness apply outside of surveys, this note considers patterns of voting in the 2007 Costa Rican plebiscite about joining the Central American Free Trade Area. Several extant theories appear to explain voting patterns, but the results are less in line with traditional economic models based on locally important economic sectors.

I haven't read it yet, and my brain is so riddled with some nasty virus that comprehending anything denser than genre fiction is impossible so it'll have to wait. It looks interesting. The external validity problem doesn't go away... Costa Rica in 2007 isn't exactly representative. But still.

A Brief History of Macroeconomics

A nice little slideshow, with useful discussion here.

Argentina Withdraws From ICSID

In a follow up to my previous post, Argentina has announced its intention to withdraw from ICSID. In this clip, government officials and commentators emphasize favoritism of firms over governments in ICSID rules. It bears mentioning that, according to ICSID case statistics, 48% of all cases ever referred to ICSID resulted in a monetary judgement in favor of investors. In 2012, 60% of all referred cases resulted in a similar monetary judgement. So, perhaps opinions on whether ICSID is biased toward investors depend in part on whether you look at levels vs. change. And, it bears repeating, Argentina has (probably) never paid an arbitral award.

HT Rob Galantucci

Don't Read; Write!

In re Will's comments on Chris Blattman's advice to graduate students about selecting research topics, I ran across this advice to young scholars from Richard Thaler:

Work on your own ideas, not your advisor’s ideas (or at least in addition to her ideas). And spend more time thinking and less time reading. Too much reading leads people to think of small variations on existing studies. Admittedly my strategy of writing the paper first and only then reading the literature (or, more likely, letting the referees tell me what they think I should have read) is an extreme one, but it is better than trying to read everything. Try writing the first paper on some topic, not the tenth, and never the 50th.

Part of this seems like solid advice for graduate students and junior faculty. No one gets tenure by reading a lot, so, "don't read, write" is probably good advice (I seem to recall this being favorite advice of Munger). Moreover, given the curse of "shrinkingly important papers," (Thaler's term) there really isn't very much that one needs to read. However, no paper is easier to publish than the one which appears to establish precisely that which everyone already believes to be true but that has not yet been established precisely. And no papers are harder to publish than those that cut against conventional wisdom. So, shooting to write the nth paper is probably a safer tenure strategy than writing the first one.

ht/Marginal Revolution

The Scorched Earth Method of Research Design

Thomas previously had some great thoughts on how to engage in the peer review process, from the perspective of an experienced reviewer. I also like this way of thinking, in many ways saying the same things as Thomas in a different way, from Chris Blattman:

The PhD slides have my first inklings of a framework for thinking about research in political economy of development. My idea is that we should be able to draw a tree from the fundamental questions (the trunk), the big questions (the boughs), and the little questions (the branches). We should be able to hang every paper on that tree. It’s a device I use when I get a paper to referee.

At this stage of my career I take this sort of advice for "reviewing" as advice for how to conceive of and carry out my research. In other words, these types of discussions help me think about what my goals should be for the program of research that I'm engaged in. So I also appreciated Blattman's conclusion:

If you are wondering what the roots to the tree are, well of course it’s the egos and established interests of faculty in the field. So of course the big lesson for my students is that they should mainly aim to burn it down.

Not every paper (or research track) can destroy the entire edifice of all previous research of course, but those that can will certainly get folks' attention.

I used to think that research programs could be divided into high-risk/high-reward strategies and lower-risk/lower-reward strategies: if you strike gold with the former, you'll do well in journals and job markets; but if you strike out you'll... strike out. On the other hand, if you aim a bit lower you'll be more likely to hit the mark. Maybe you'll never be an academic superstar, but you'll never be unemployed either. Using Blattman's metaphor, this is the difference between a research program that exists on the trunk (or sets fire to the roots) and one which lives among the branches.

That may be true, but having recently gone through the job market process for the first time* I'm beginning to think that the "safe" path is actually not low-risk at all. By that I mean that the success of a research program which only asks branch questions is idiosyncratic: some hiring committee better be really interested in those particular branches, or else generating sufficient interest in your research to get a job offer will be difficult. At the same time, there better not be anyone else on the market investigating these particular branches; or if there is, you need to be doing it noticeably better than them.

Branch-work, by definition, does not have immediate appeal to the broad discipline. And broad appeal is helpful when trying to convince hiring committees (and then entire departments) that your work is interesting and important enough that they should pay you to do it, even if most of them don't really understand the particulars of what you're doing.

That doesn't mean that every grad student should try to upend the discipline with every dissertation. That's not my strategy, and I don't think it's a good one. It does mean that research programs which ask big questions of broad interest -- bough and trunk -- are at an advantage to those which do not, holding the quality of the research constant. And those which can ignite the roots are better still.**

*About which more another time, I suppose. I've been planning to write a post about this for awhile now, but haven't been motivated.

**Unless you're trying to get hired in a department where those roots are buried.

New Investment Trend Data for 2012 Released

UNCTAD released new figures for 2012 FDI flows. Despite previous projections for a modest FDI increase, 2012 saw FDI flows decline by 18%. The aggregate numbers, however, conceal the fact that investment flow trends vary widely based on: investment source, investment destination, and investment type.

The EU and the US saw steep declines in FDI inflows; developed economies saw FDI decreases of 32%. Meanwhile, Investment flows to developing countries saw only modest declines of 3%. Africa and Latin America actually saw investment flow increases. Much of the decline in FDI is attributable to a stall in cross-boarder M&As, which were off 41%. Developed economies typically saw a divestment trend in their MNEs while MNEs headquartered in developing economies expanded through M&As. Greenfield investments are off 34%, but still accounted for over 66% of FDI flows for 2012.

You can read more here.

What Might a US-EU FTA Mean for International Investment Treaties?

In a previous post, Will discussed how a potential US-EU free trade agreement might effect widespread trade liberalization through inclusive institutions such as the UN. Indeed, many commentators are wary of the possible deal, believing it to signal the end of inclusive negotiations that characterize the WTO (though Will provides a nice counter to such alarmist claims).

A ratified US-EU FTA also has the capacity to change international investment law quite fundamentally. At stake is whether an agreement would have an investor-state dispute clause (ISD). Unlike traditional dispute settlement mechanisms, ISDs allow firms to sue states directly, usually within the context of an international arbital board such as the International Centre for the Settlement of Investment Disputes (ICSID). ISDs are controversial primarily because there is a widespread fear that MNC with deep pockets will engage in litigation wars of attrition. Furthermore, when investors can sue states directly, governments no longer have access to diplomatic tools to smooth over disputes. And, to the extent that the long term viability of open goods and capital markets requires some flexibility to deal with domestic push-back, the removal of states as arbiters of which investment disputes are worth pursuing and which are better left ignored could have lasting negative implications for the political viability of economic openness.

Unlike some other aspects of FTAs, ISDs can actually become salient issues. In South Korea there were a series of protests against the ISD provision of the recently ratified US-South Korea FTA. Other countries, including India, South Africa, and Australia, have recently decided to nullify portions of trade and investment treaties that include ISD provisions. Still, ISDs are widespread. The model US Bilateral Investment Treaty includes an ISD provision and ISD clauses are standard in US FTAs. However, the types of treaties that contain ISD clauses tend to be signed between states characterized by economic asymmetries.* BITs are a prime example - while over 2000 such treaties exist, there are no BITs between two advanced industrial economies.

So, the question then is whether a US-EU FTA agreement will include an ISD clause. Generally, advanced industrial countries have shown they are more interested in promoting legal regimes that protect "their" MNEs while less willing to cede jurisdiction over investment disputes in which they might be a defendant. For instance, Australia has decided to drop ISD clauses from its BIT and FTA regime after it was sued by Philip Morris; Philip Morris used Australia's BIT with Hong Kong to establish ICSID jurisdiction. Given growing dissatisfaction with the costs of ISD, it will be interesting to see if such clauses would persist if the US and EU decide to not subject themselves to such extra-territorial juridical measures.

My quick, speculative take is that ISDs will be less widely used in the future. As advanced industrial economies begin to receive more FDI from emerging economies with which they have such dispute clauses, they will seek to extract themselves from such agreements. Moreover, a movement away from ISDs may be a good thing. First, ISDs tend to create duplicated layers of juridical authority that generate confusion. Second, as mentioned above, ISDs make it harder for governments to intercede in investor-state disputes in ways that allow for flexibility necessary to maintain broad coalitions of support for deep economic integration. Finally, there is some evidence that states with ISDs tend not to pursue meaningful domestic legal reforms, and thus ISDs can contribute to the persistence of partial economic reforms that ultimately impede broad-based growth.** Removing ISDs may help overcome some of these problems.

*An important semi-exception is that NAFTA includes ISD provisions. However, this clause remains quite controversial in Canada. Canada has not yet ratified the ICSID convention, reiterating the extent to which countries are quite resistant to ceding final arbital authority to an international tribunal. Additionally, the US-Australia FTA suggests, but does not require, dispute settlements between investors and states.
** A place to start reading about this: Ginsburg, Tom (2005) "International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance" International Review of Law and Economics 25:107-123.

Adventures Near the Inflection Point of the Laffer Curve

First, France: Gerard Depardieu has left the country to avoid paying the new top marginal tax rate of 75%. He's apparently moved to Belgium for now, but Putin has given him a Russian passport and an offer of citizenship just in case he develops a taste for little water.

Second, France again: Nicholas Sarkozy and Carla Bruni are considering doing the same thing, perhaps by moving to London. In a first-as-tragedy-then-as-farce moment, David Cameron is actively recruiting tax exiles. (Remember that in the not-so-distant past tax exiles were leaving Britain for France, among other locales. Here's a 1977 op-ed talking about the phenomenon among musicians. The Rolling Stones wrote and recorded Exile on Main Street as tax refugees. Others included Ringo Starr, Peter Sellers, Sean Connery, and many more. Here's a slideshow of some notable examples.)

Third, California: Phil Mickelson has said that he may leave the state as a result of significant income tax increases at the state and national levels. California's income tax rate is 13.3% for top earners; Texas and Florida don't have a state income tax at all. Mickelson makes upwards of $40mn/year, so moving from CA to FL could net him $5-6mn/year, if he could save the whole 13.3%. In total, Mickelson claims he'll be losing 62-63% of his income to various taxes.

Note that Piketty and Saez estimated the "optimal" top marginal tax rate -- where "optimal" in this case means maximizing public revenue while minimizing income inequality -- as something like 75-80%. (Although it should be noted that this conclusion is based on an assumption that is less likely to hold in Europe as it is in the U.S.) In other words, that's the approximate point where the slope of the Laffer Curve zeroes out and then turns negative. In this case, the anecdotes roughly correspond to the theory: the margin seems to lie at around a 65-75% top tax rate, which can be sustained before avoidance starts becoming widespread.

As a closing aside, in the U.S. state income taxes can be deducted from federal income taxes. As I understand it, there is no limit to the amount of these deductions. This raises an interesting political question: why don't states set their income taxes at exactly the same levels as federal income taxes? Their tax-paying citizens would be no worse off -- they'd pay the same amount of tax, deducting from their federal bill what they pay to their state -- while the state's finances would be significantly better off. The federal government's budget balance would take a hit, but why should state legislatures care about that? Obviously some complications would arise, e.g. everyone would need to itemize deductions, but it seems like these could be fairly easily managed.

Or maybe not. I'm no accountant or lawyer, so its possible that this is completely wrong. But if it isn't why hasn't anybody tried it?

WTO Director General

The upcoming transition of the WTO Director General has been getting a lot of press recently.  Pascal Lamy’s successor could potentially have a tough go of it --  taking over in the wake of a less-than-successful Doha Round.  See here and here.  The folks over at IELPB chime in here.

There are 9 candidates in the running, from Ghana, Costa Rica, New Zealand, Kenya, Jordan, Indonesia, the Republic of Korea, Brazil and Mexico.  Stuff on Mexico’s candidate (here), Indonesia’s candidate (here), Kenya’s candidate (here), and New Zealand’s candidate (here).