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Unpacking Policy Space in International Trade Law: The Auto Industry in Brazil and the United States
Ada Bogliolo Piancastelli de Siqueira
Submitted in partial fulfillment of the requirements of the degree of Doctor of Juridical Science (SJD) at the Georgetown University Law Center
2019
Dissertation supervisor: Professor Alvaro Santos
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Abstract
This thesis aims to deconstruct the notion of policy space in international trade law. It presents the idea of “unpacking policy space” to suggest that policy space is not merely a concept relating to what room for policy is available under the law. Rather, it demonstrates that this commonly used concept overlooks important regulatory influences that define countries ability to regulate.
The dissertation makes two main claims. First, it claims that policy space for industrial and developmental policies extends beyond WTO law and depends not only on international rules; but rather, on systems of domestic and transnational rules and regulations. Second, it argues that by analyzing how different domestic structures lead to different regulatory preferences and possibilities, this analysis provides an insight into how similar transnational and international rules translate differently into different countries. It presents four case studies that assess how the existing regulatory frameworks shaped policies for the automotive industry in Brazil and the United States. The case studies analyze the legal architecture and meaning of industrial policies developed by Brazil and by the United States in the years during the establishment of the WTO (1993-1999) and, subsequently, in the financial crisis period (2007 – 2013).
The thesis reveals how day-to-day background operations within the international trade system result in a pre-selected range of ideological, political and economic choices within a much broader universe of possibilities even before the engagement of governments and other international actors. In doing so, it fills a gap in the literature that has traditionally focused on the relationship between national economic policies and international rules to understand regulatory constraints and policy space in the trading regime. It contributes to the literature by suggesting that regulatory options vary according to the level of regulation for each specific sector as well as in relation to countries’ domestic structures and institutions. It deconstructs the supposed institutional neutrality embedded in the notion of policy space by providing a realist analysis of background norms and legal processes in the global economy. In doing so, this thesis aims to expose ideological biases within the notion of policy space and explain the distributional outcomes that derive from it.
Keywords: International Trade Law, Policy Space, Automotive Industry, Brazil, United States ______page iii
For Lexi,
For her wisdom and her guidance.
Because she always understood.
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Acknowledgements
The path toward this dissertation has been circuitous. Its completion is thanks in large part to the special people who challenged, supported, and pushed me along the way.
I owe this dissertation to the generous guidance, patient and wise mentorship and enduring trust of my supervisor Professor Alvaro Santos, who steered me through the long road of a doctorate degree. His support and feedback contributed greatly to the final product of my research. I am profoundly grateful to my three committee members Jennifer Hilmann, Professor Andrew Lang and Professor Michelle Ratton Badin Sanchez who were mentors throughout my SJD candidacy. I thank you for bringing a depth of knowledge to my work that few could match. Your support and feedback contributed greatly to the final product of my research.
I could not have succeeded in this endeavor without the guidance of our SJD Program Director, Professor Alexa Freeman. I tremendously appreciate her support throughout my candidacy. I cannot thank her enough for the years of SJD workshops, colloquiums, collaboratives that pushed this research forward. I also would like to thank my colleagues in the SJD cohort for their friendship, stimulation, and guidance. Special thanks to my inspiring colleagues Alexandra Phelan and Julia Cadaval, for the enduring friendship, emotional and intellectual support. I would also not have been able to complete this SJD without the unwavering support, intellectual guidance, and sisterly love of my dear colleague, Edit Frenyo. Thank you for being a source of strength for me in the SJD and in life.
I benefitted greatly from participating in the conferences and workshop of Harvard’s Institute of Global Law and Policy, which allowed me to become a part of a vibrant network of scholars from around the world. Engaging with David Kennedy on research structure and critical legal scholarship.
Thanks are also due to the Brazilian Research Council (CNPq) for the financial support I have received during the course of my candidacy, under process number 249135/2012-4.
Sweet memories to all my faraway family in Brazil, without whose financial and emotional support I would have not been able to complete this thesis. Mom, and dad, thank you for doing everything to support, encourage, love and see me through this process. ______page v
TABLE OF CONTENTS
Page
INTRODUCTION...... 1
I. CHAPTER 1: UNPACKING POLICY SPACE ...... 9
A. A MULTI-LAYERED ANALYSIS OF POLICY SPACE ...... 9
1. Domestic Restrictions to Economic Policy Space ...... 10
2. Corporate Strategies and Global Value Chains ...... 12
3. International Standards and Regulations ...... 16
B. DISTRIBUTIVE PERSPECTIVES ON POLICY SPACE...... 19
1. Policy Space and the Dynamic of Differences ...... 22
2. Institutional Preferences and Global Distributive Consequences . 27
a. The ITO and the GATT Negotiations: Policy Space as an Anglo Bargain ...... 28
b. 1950s and 1960s: Policy Space as Non-Reciprocity ...... 36
c. The 1970s and 1980s: Institutional Experimentation as Policy Space ...... 42
3. Depoliticization of Trade Law and the Role of Experts ...... 46
a. Legal definition of economic concepts ...... 47
b. The Role of Experts ...... 54
c. Destabilizing the Narratives of Trade Expertise ...... 57
C. Concluding Remarks ...... 62
II. CHAPTER 2: POLICY SPACE AND THE AUTO INDUSTRY AFTER THE ESTABLISHMENT OF THE WTO ...... 63
A. The Case of Brazil ...... 63
1. The 1995 New Auto Regime ...... 66
2. International Rules ...... 72
a. The Mercosur Effect ...... 72
b. The New Auto Regime at the WTO ...... 75 ______page vi
i. Defining ‘critical situation’ in the Balance-of- Payments ...... 76
ii. Renegotiating the Limits and Scope of the New Auto Regime...... 81
3. Domestic Rules ...... 84
a. Brazil’s Dual Value Added Tax and Federal Autonomy ...... 85
b. Brazilian Fiscal Wars ...... 88
4. Global Value Chains and Corporate Governance ...... 94
a. Producer Relationships and Distributional Power within GVCs ...... 95
b. The Geographical Organization of GVCs ...... 100
5. Informal Regulations and Standards ...... 102
a. Car Emission Standards ...... 102
b. Fuel Efficiency Standards ...... 106
6. Case Study Conclusions on Brazil ...... 108
B. The Case of the United States ...... 109
1. International Rules ...... 113
a. NAFTA: Creating a Regional Industry ...... 113
b. US – Automobiles: CAFE Standards, Gas Guzzler and Luxury Taxes ...... 116
c. US – Section 301 of the 1974 Trade Act ...... 121
2. Domestic Rules ...... 124
a. US Managed Trade Policy ...... 125
b. Redefining Domestic Production ...... 132
c. The US Motor Vehicle Manufacturers Association ...... 132
d. The American Automobile Labelling Act ...... 134
3. Global Value Chains and Corporate Governance ...... 136
4. Informal Regulations and Standards ...... 140
5. Case Study Conclusions on the United States ...... 143 ______page vii
C. A Comparative and Distributional Analysis of Policy Space for Chapter III ...... 146
1. Policy Space and the Dynamic of Differences ...... 147
2. Institutional Preferences and Global Distributive Consequences...... 152
3. Depoliticization of Trade Law and the Role of Experts ...... 155
III. CHAPTER 3: POLICY SPACE AND POST-CRISIS MEASURES FOR THE AUTO-INDUSTRY ...... 160
A. The Case of Brazil ...... 160
1. Post-Crisis Measures for the Auto Industry ...... 161
2. International Rules ...... 171
a. The Complaint Against Inovar Auto ...... 172
b. Regional Structures and Changes to the Brazilian Regime ... 176
3. Domestic Rules ...... 182
a. Defining “Harm” in Brazilian Constitutional Law ...... 182
b. INOVAR-AUTO’s Imprecise Legal Definitions and Changing Regulatory Environment ...... 187
4. Global Value Chains and Corporate Governance ...... 190
a. The BMW Effect in Shaping the INOVAR-AUTO Regime ..... 191
5. Informal Regulations and Standards ...... 195
a. Fuel Efficiency Standards ...... 195
b. Car Emission Standards ...... 197
6. Case Study Conclusions on Brazil ...... 198
B. The Case of the United States ...... 201
1. Post-Crisis Measures for the Auto Industry ...... 204
a. Automotive Industry Financing Program (AIFP) ...... 205
b. The American Recovery and Reinvestment Act of 2009 (ARRA) ...... 207
c. Auto Supplier Support Program ...... 209 ______page viii
1. International Rules ...... 211
2. Domestic Rules ...... 213
3. Corporate Strategy and GVC ...... 219
4. Standards and Informal Regulations ...... 224
a. The Stimulus for Fuel Efficiency: Car Allowance Rebate System (CARS) ...... 225
b. Clean Energy Standards and the American Reinvestment and Recovery Act (ARRA) ...... 226
5. Case Study Conclusions on the United States ...... 227
A. A Comparative and Distributional Analysis of Policy Space for Chapter IV ...... 230
a. Policy Space and the Dynamic of Differences ...... 230
b. Institutional Preferences and Global Distributive Consequences ...... 233
c. Depoliticization of Trade Law and the Role of Experts ...... 236
IV. THESIS CONCLUSIONS ...... 239
LIST OF ABBREVIATIONS ...... 245
LIST OF FIGURES ...... 248
LIST OF TABLES ...... 249
BIBLIOGRAPHICAL REFERENCES: ...... 250
page 1
INTRODUCTION
Legal regimes embody political and social struggles. The choice for a specific law or way of regulating is also a choice for an over-arching way to understand reality. The story of the international trading regime tells one among many plausible narratives. The post-Second World War economic regime has often been told as the story of a promising new system of multilateralism and cooperation: a promise of a future wherein close-knit economic relations would foster world peace and global economic development. The establishment of the General Agreement on Tariffs and Trade (GATT) and, fifty years later, the World Trade Organization (WTO) are Chapters in a storyline that ends with integrated global markets and improved of standards of living.
The legal, economic, and political preferences ingrained in the promise of the post-war international economic system have shaped how nations have related to each other for over seventy years. For this reason, uncovering the narrative qualities of legal regimes, their causal presentation of events as well as their prescriptive assumptions about correct behavior, is vital to understanding how the law operates, under what premises, and with what contingencies. The notion of policy space under WTO rules is at the center of that quest. The concept is centered on the understanding that the rules of the GATT/WTO system unduly limited the use of important economic policies for the development. As such, the idea of policy space within the trading system has been one of the most significant rhetorical tools used to question and to discuss legal limits of the postwar trading regime.
Over the last thirty years, the term has grown in meaning and importance (see Section I.B.2 for the history of the concept of policy space). It has become a proxy for the dissatisfaction of those who have not accrued the gains of trade. It has also served to illustrate actors’ discontent with the path for development set out within the proposed economic worldview. The thesis draws upon this concept to understand how countries experience autonomy to implement their desired economic policies within the international trading system.
At the outset, it is key to qualify that this thesis refers to the notion of policy space as the ability of countries to implement their desired economic policies. While this concept has originally been confined to the realm of WTO law, the thesis “unpacks” this concept to show that such notion overlooks important regulatory influences that define countries ability to regulate. Further, and although there is much to be regarding conceptual differences between the ideas of “policy space” and “regulatory autonomy”, the thesis refers to them page 2 interchangeably insofar as it refers to constraints experienced by countries in implementing economic policy.1 As such, the idea of “unpacking policy space” suggests that policy space is not merely a concept relating to what room for policy is available under the law. Rather, that there is a matter of ability to regulate, to influence regulations and to make regulation.
Studies on policy space for domestic regulatory autonomy within the trading system have discussed the effects of international trading rules on countries’ abilities to implement their preferred policy choices domestically. The outcome of the Uruguay Round of multilateral trade negotiations extended the scope of multilateral disciplines to include rules that impinge directly on countries’ domestic policies. While some studies voice the concern that WTO disciplines prevent countries from following their desired economic policies,2 others argue that, despite the Uruguay Round of Agreements, there remains ample policy space for development policies under WTO law.3
The issue of whether countries retain the ability to implement their preferred domestic economic policies regained strength in the context of the 2007-2009 global financial crisis. During that period, the WTO,4 the Global Trade Alert (GTA)5 and the International Monetary Fund (IMF)6 reported a proliferation of national protectionist measures associated with domestic industrial policy programs across the globe. These studies argued that WTO Member States made use of an overly broad definition of domestic policy space within WTO
1 Ada Bogliolo Piancastelli Siqueira & Julia Cadaval Martins. "Policy Space and Policy Autonomy under the WTO: A Comparison of Post-Crisis Industrial Policies in Brazil and the US." LAW AND DEVELOPMENT REVIEW 8.2 (2015): 389-432. 2 HA-JOON CHANG, GLOBALIZATION, ECONOMIC DEVELOPMENT AND THE ROLE OF THE STATE (2002); ANDREW LANG, WORLD TRADE LAW AFTER NEOLIBERALISM: REIMAGINING THE GLOBAL ECONOMIC ORDER (2011); JOSEPH E. STIGLITZ & ANDREW CHARLTON, FAIR TRADE FOR ALL: HOW TRADE CAN PROMOTE DEVELOPMENT (2006); Dani Rodrik, Has Globalization Gone Too Far?, 41 CHALLENGE 81 (1998); Dani Rodrik, The Limits of Trade Policy Reform in Developing Countries, 6 J. ECON. PERSPECTIVES 87 (1992). 3 Vinod K. Aggarwal & Simon J. Evenett, Do WTO Rules Preclude Industrial Policy? Evidence from the Global Economic Crisis, 16 BUS. & POL. 481 (2014); Alice Amsden, Promoting Industry Under WTO Law, in PUTTING DEVELOPMENT FIRST 216 (Kevin P. Gallagher ed., 2005); Alice H. Amsden & Takashi Hikino, The Bark Is Worse Than the Bite: New WTO Law and Late Industrialization, 570 ANNALS AM. ACAD. POL. & SOC. SCI. 104 (2000); Alvaro Santos, Carving Out Policy Autonomy for Developing Countries in the World Trade Organization: The Experience of Brazil and Mexico, 52 VA. J. INT’L L. 551 (2012). 4 Lamy Warns Against Protectionism Amid Financial Crisis, WORLD TRADE ORG. (Sept. 24, 2008), https://www.wto.org/english/news_e/sppl_e/sppl101_e.htm. 5 The Global Trade Alert is a database run by the Centre for Economic Policy Research, an independent academic and policy research think tank based in London, United Kingdom. Its data draws upon expertise and analysis from seven independent research institutions around the world. See, e.g., GLOB. TRADE ALERT & CTR. FOR ECON. POLICY RESEARCH, DÉBÂCLE: THE 11TH GTA REPORT ON PROTECTIONISM (Simon J. Evenett ed., 2012), https://www.globaltradealert.org/reports/download/29. 6 Bradley J. McDonald & Christian Henn, Protectionist Responses to the Crisis: Damage Observed in Product- Level Trade (Int’l Monetary Fund, Working Paper No. 11/139, 2011), https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Protectionist-Responses-to-the-Crisis-Damage- Observed-in-Product-Level-Trade-24975. page 3 rules. In agreement, Aggarwal and Evenett7 suggest that different countries tend to resort to different regulatory measures in their attempts to carve out policy space for domestic economic measures. While some countries resort to traditional border measures such as trade defenses or industrial policy interventions, others seek to circumvent stricter WTO regulations by designing policies related to less traditional trade instruments, such as tax incentives and subsidies for environmentally friendly industries. Nevertheless, both groups of countries continue to discriminate against foreign commercial interests in spite of the different international perception, shaped and formed by the economic orientation embodied in WTO rules.8
Aggarwal and Evenett document that, during the period between November 2008 and May 2012, leading economic powers, such as the United States, the European Union, South Korea and Japan, resorted to targeted economic intervention through policy instruments that are covered by less stringent types of WTO rules. They show that “the resort to weakly WTO regulated measures ranges from 11 percent of measures in the case of Brazil to a high of 84 per cent in the case of the European Union.”9 Overall, such evidence supports the contention that WTO rules have affected the composition of crisis-era discrimination measures rather than their quantity.10 In terms of understanding the concept of policy space, Aggarwal and Evenett’s suggest that in the context of the crisis, countries have sought different ways to intervene in their economies. As opposed to being more or less interventionist under WTO rules, countries intervened at different regulatory levels and through different institutional mechanisms. The institutional experimentation in the period illustrates how the concept of policy space is malleable and experienced differently by each country.
Since the 2007-2009 financial crisis, other geopolitical events have also shaken basic economic assumptions underlying international trade agreements and the WTO. The rise of China as the main player in the WTO Dispute Settlement System, coupled with the
7 Vinod K. Aggarwal & Simon J. Evenett, Industrial Policy Choice During the Crisis Era, 28 OXFORD REV. ECON. POL’Y 261 (2012), https://doi.org/10.1093/oxrep/grs017. 8 Id. 9 This can be contrasted with traditional forms of protectionism that are covered by stricter WTO rules. For example, migration, bailouts and state aids, competitive devaluations, investment incentives, export taxes, trade finance, and steps by subnational governments and state-owned enterprises. See id. 10 Aggarwal & Evenett, supra note 7; Simon J. Evenett, Did WTO Rules Restrain Protectionism During the Recent Systemic Crisis?, in THE WORLD ECONOMY AFTER THE GLOBAL CRISIS: A NEW ECONOMIC ORDER FOR THE 21ST CENTURY 29 (Barry Eichengreen & Bokyeong Park eds., World Sci. Studies in Int’l Econ. Ser. No. 19, 2012), https://doi.org/10.1142/9789814383042_0003. page 4 withdrawal of the United States as the traditional hegemon11 has put in check the idea that the world view embedded in trade law is “right” “just” or even “accurate.”12 In a struggle to transition to a market economy, China has become an active participant of the system despite (and because of) its state-managed economic system. Contrarily, the United States has taken a step back from the multilateral system to resort to unilateral action and retaliation based on more protectionist understandings of economic development. Amid these contrasting attitudes towards the regime, this dissertation analyzes what are, in effect, the economic justifications for the international trading system. How have they changed? What is the role of law in shaping, creating, and limiting economic policy and economic thought?
While traditional accounts of states’ regulatory possibilities, such as the one provided by Aggarwal and Evenett, describe how international rules limit the potential of countries to implement policies for economic development,13 this work maps out how the concept of policy space obscures the complexity of the regulatory and ideological framework behind trade processes across the globe. Though most of the narratives on policy space are grounded in different ideologies of economic thought, this research explains how law influences, creates and curtails economic and institutional choices within the trading system.
As such, this thesis departs from the question of whether there is or there is not policy space for development under international law. Instead, it provides a realist insight14 into how this concept is translated within the complex system of transnational trade relations. The thesis
11See ROBERT O. KEOHANE, AFTER HEGEMONY: COOPERATION AND DISCORD IN THE WORLD POLITICAL ECONOMY (2nd ed. 2005). 12 CRAIG VANGRASSTEK, WORLD TRADE ORG., THE HISTORY AND FUTURE OF THE WORLD TRADE ORGANIZATION 11 (2013). 13 For similar approaches, see NAGESH KUMAR & KEVIN GALLAGHER, RESEARCH & INFO. SYS. FOR DEV. COUNTRIES, THE RELEVANCE OF ‘POLICY SPACE’ FOR DEVELOPMENT: IMPLICATIONS FOR MULTILATERAL TRADE NEGOTIATIONS (Discussion Papers No. 120, 2007); SHEILA PAGE, OVERSEAS DEV. INST., POLICY SPACE: ARE WTO RULES PREVENTING DEVELOPMENT? (Briefing Paper No. 17, 2007); Amsden & Hikino, supra note 3; Chang, see note 100, at 627–633; Alisa DiCaprio & Kevin P. Gallagher, The WTO and the Shrinking of Development Space: How Big is the Bite?, 7 J. WORLD INV. & TRADE 781 (2006); Mayer, see note 100; Shadlen, see note 100. 14 In the United States, the tradition is often said to have begun with Oliver Wendell Holmes who famously asserted that judges themselves have failed to adequately recognize their duty of weighing considerations of social advantage. See Oliver W. Homes, The Path of the Law, 10 HARV. L. REV. 457 (1897); see also MORRIS RAPHAEL COHEN, LAW AND THE SOCIAL ORDER: ESSAYS IN LEGAL PHILOSOPHY (Transaction Books 1982) (1933); John R. Commons, LEGAL FOUNDATIONS OF CAPITALISM (Transaction Publishers, 2nd ed. 2007) (1924); Felix S. Cohen, Transcendental Nonsense and the Functional Approach, 35 COLUMB. L. REV. 809 (1935); Marc Galanter, Why the ‘Haves’ Come Out Ahead: Speculations on the Limits of Legal Change, 9 L. & SOC’Y REV. 95 (1974); Robert L. Hale, Bargaining, Duress, and Economic Liberty, 43 COLUMB. L. REV. 603 (1943); Robert L. Hale, Coercion and Distribution in a Supposedly Non-Coercive State, 38 POL. SCI. Q. 470 (1923). page 5 makes the case that the current discussion fails to reflect how countries experience policy space within transnational processes in global trade as well as in relation to each other.
For the sake of clarity, this work does not attempt to cast judgment on the appropriateness of countries’ policies in seeking to expand their policy space within the system. Rather, it demystifies the narrative that the trading system is institutionally neutral in allowing countries to impose trade-related measures under the same legal regime.
This thesis provides a comprehensive understanding of how international trade agreements work as part of a larger regulatory dynamics that is equally determinative to understand to what extent countries preserve regulatory autonomy and how political and distributive choices are maintained. The thesis makes two points. First, it claims that policy space for industrial and developmental policies extends beyond WTO law and depends not only on international rules; but rather, on systems of domestic and transnational rules and regulations.15 Second, it argues that by analyzing how different domestic structures lead to different regulatory preferences and possibilities, this analysis provides an insight into how similar transnational and international rules translate differently into different countries.
To develop this first point, Chapter I of this thesis presents some of the different regulatory levels that influence how countries can regulate and implement economic policy. By mapping out the different layers of analysis, the Chapter provides a method to understand how different levels of regulations can propagate, limit, or change basic notions of commerce and economic development. The objective of presenting this multi-layered view of countries’ economic autonomy is to understand the distributive role that these systems play when operating in tandem. That is to say; the thesis argues that looking solely at international trade law constraints fails to explain how the trading system operates to make decisions, empower actors, and distribute gains across the globe. Rather, it offers a comprehensive analysis of different regulatory frameworks to paint a more sophisticated picture of when and where possibilities for economic policies are made, limited, or even enlarged.
15 Importantly, this thesis looks at how rules (international, domestic, transnational, informal standards) shape what is understood as policy space. It is not within the scope of this work to look at other economic factors that affect policy space, such as macroeconomic and exchange-rate policies, international market conditions, market and government failures, and disciplines in international monetary and financial relationships. page 6
Figure 1: Regulations that Shape Policy Space in the International Trading System
Cooporate Policy space decisions and Global Value under WTO Domestic Chains law Constrains
Informal standards
Chapter I then proceeds to presents three key approaches to explain some of the notions contained in the expression policy space. The first approach draws on critical legal theory to suggest how the notion of policy space perpetuates a ‘dynamic of difference’ and blurs economic struggles in international economic relations. It attributes the same capacity of agency to all members, conflating formal regulatory autonomy with effective regulatory autonomy. The second approach brings forward the notion of that economic logic that underlies the international trading system is contingent on specific contextual political, economic, and social contexts. It illustrates how contextual and historical contexts have shaped the regime and allowed for, at times, different degrees of institutional and economic experimentation. The third approach explains how the idea of policy space is based on background practices of trade experts and professionals that reinforce the perception that the trade regime is institutionally neutral, depoliticizing the regime and the nature of their practice.
Chapters II and III present four case studies that comparatively assess how the existing regulatory frameworks shaped policies for the automotive industry in Brazil and the United page 7
States. The case studies analyze two specific moments in time. First, the thesis looks at the legal architecture and meaning of industrial policies developed by Brazil and by the United States in the post-WTO years. This was a period of widespread liberalization and opening of markets with the establishment of the WTO and NAFTA (1993 – 1997). Second, it turns to the post-financial crisis period (2007 – 2013) to better understand the regulatory options and choices that were available to both governments under the international trading system during a time of global economic recession. By exploring the legal architecture and meaning of industrial policies developed by Brazil and the United States, the research maps the choices that were available to each government during each of these two significant moments.
Under each individual case study, the thesis makes its first contribution to show that non- WTO dimensions of policy space have an important aspect in defining the regulatory space experienced my each country at a given point in time. Both case studies of Brazil as well as the US case studies show that each of these layers had a different effect in the process of implementation of domestic policies. The case studies conclude that the notion of policy space under WTO rules does not reflect the full scope of regulatory frameworks that constrain/enable the ability to implement economic policy in the international economic framework.
The thesis makes its second contribution under the analytical conclusion for Chapters II & III. The analyses show that the interaction of these regulatory structures lead to different outcomes according to each country. Through the prisms of the ‘dynamic of differences’, institutional regulatory preferences and, the role that expertise, the thesis demonstrates how international trade agreements work in tandem with other factors to distribute comparative advantage and the gains from trade.
This thesis fills a gap in the literature that has traditionally focused on the relationship between national economic policies and international rules to understand regulatory constraints and policy space in the trading regime. It suggests that a realist analysis of states' policy space opens up new avenues for discussing economic policies in a transnational regulatory context. It contributes to the literature by suggesting that regulatory options vary according to the level of regulation for each specific sector as well as in relation to countries’ domestic structures and institutions. It deconstructs the supposed institutional neutrality embedded in the notion of policy space by providing a realist analysis of background norms and legal processes in the global economy. In doing so, this thesis aims to expose ideological page 8 biases within the notion of policy space and explain the distributional outcomes that derive from it.
The work intervenes in the broader field of trade law and development by illustrating to trade professionals, governments, and scholars that economic preferences deemed to be legitimate, as well as the negative right to policy space, are both parts of constantly shifting political struggles. These struggles take place among a wider range of actors than mere WTO Members, their negotiations and dispute settlements. To this audience, the work provides guidelines to better capture the moments and points of struggle where the economic rationale is created and absorbed into a trading regime that extends far beyond the institutional confines of the WTO.
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I. CHAPTER 1: UNPACKING POLICY SPACE
Studies on policy space for regulatory autonomy within the trading system have largely discussed the effects of international trading rules in countries’ abilities to implement their policy choices domestically. This dissertation departs from that tradition to provide a realist insight of how the same rules at the international level affect countries differently depending on their domestic institutional structures, their relationship with large corporate actors, the strategic place of their industries in global value chains (GVCs) as well as their incorporation of international standards and regulations.
First, Section A presents a methodological approach to rethink the different layers of policy space that influence countries regulatory choices. It suggests that, combined, different levels of regulation shape the contours of a state’s realm of economic regulatory possibilities. In this sense, it challenges the notion that changes in the permissiveness of WTO rules are in and of itself capable of allowing for more institutional experimentation as the solution for implementing development policies.
Second, a comprehensive analysis of the overall outcome of a multi-layered, transnational analysis of policy space is needed to identify the distributional consequences of the international trading system. To do so, the next Section of this Chapter (Section B) will identify patterns, legal structures and designs in legal regimes that affect the varying distributional outcomes that the trading system has on each country.
Overall, the Chapter suggests that while until now, policy space was mostly understood as an entry point to argue for more permissiveness under WTO rule and more autonomy for countries to implement development policies, this is a misperception. The idea of policy space obscures ways in which institutional possibilities are limited within this narrative according to each different state. Further: it obfuscates the background distributive choices are made within the trading system.
A. A MULTI-LAYERED ANALYSIS OF POLICY SPACE
This Section looks at how different levels enable or constrain countries’ policy space in the trading system. First, challenges at the domestic levels can operate as an obstacle to the implementation of the desired policies. Second, it describes how the internal logic of global value chains and corporate strategies impact the ability of governments to regulate. Finally, it page 10 analyzes what effects (if any) do international standards and regulations have on states regulatory preferences, how they choose to incorporate or reject these standards and what does that mean for their regulatory preferences.
The methodological option to divide the studies into these three categories is not without flaws. Arguably, corporate governance and global value chains often operate jointly with the creation and diffusion of international standards and regulations. Likewise, informal standards and regulations may also be inherently connected to domestic state action and governmental regulatory choices. Being mindful of such overlaps, the methodological division in these three forms of transnational regulatory influences is useful to illustrate the different norms that constantly act to direct state action in addition to the traditional focus on solely international law.
Through the analysis of the prospective case studies, namely, Brazil and the US’ automobile sectors, Section A shows how these different regulatory traditions have interacted with the trading system, the role played by law in these systems and what does this mean for each countries’ policy space within the international trade regime. It suggests that these case studies offer a convincing picture of the relationship between domestic regulatory regimes and policy space within the trading system given that they are sufficiently interrelated while, at the same time, deeply connected to important areas of economic development: industry and manufacture, on the one hand, and agriculture on the other.
1. Domestic Restrictions to Economic Policy Space
Domestic political and institutional processes are an important part of what defines states actions and their capacity to act under international trade law. Political and institutional processes happening in the domestic sphere condition policy options available to states in a manner of different ways.16 The links between domestic politics and international political
16 HELEN V. MILNER, INTERESTS, INSTITUTIONS, AND INFORMATION: DOMESTIC POLITICS AND INTERNATIONAL RELATIONS (1997); RONALD ROGOWSKI, COMMERCE AND COALITIONS: HOW TRADE AFFECTS DOMESTIC POLITICAL ALIGNMENTS (reprt. ed. 1990) (1989); John Kurt Jacobsen, Review: Are All Politics Domestic? Perspectives on the Integration of Comparative Politics and International Relations Theories, 29 COMP. POL. 93 (1996); Helen V. Milner & Robert O. Keohane, Internationalization and Domestic Politics, in INTERNATIONALIZATION AND DOMESTIC POLITICS 3 (Helen V. Milner & Robert O. Keohane eds., 1996); Helen V. Milner & B. Peter Rosendorff, Democratic Politics and International Trade Negotiations Elections and Divided Government as Constraints on Trade Liberalization, 41 J. CONFLICT RESOLUTION 117 (1997); Robert Pahre & Paul A. Papayoanou, Using Game Theory to Link Domestic and International Politics, 41 J. CONFLICT RESOLUTION 4 (1997); Fareed Zakaria & Jack Snyder, Realism and Domestic Politics: A Review Essay, 17 INT’L SECURITY 177 (1992). page 11 economy have been studied under the lenses of comparative politics,17 neoliberal institutional perspectives,18 constructivist approaches,19 among others. Nonetheless, most of this literature has focused on two-level games and ties between domestic variables and international outcomes on a generalized scenario and tactics that apply across diverse national settings. Here, this thesis takes a different approach from these perspectives to focus on how different legal and institutional architectures on the domestic level influence the scope of actions available to the state on an international level.
This means that the focus of the current analysis lies in the routine forms of interaction between domestic and international institutions.20 This is important because though plenty has been written on domestic political economy in the dynamic of trade relations, scholars too often fail to consider the way the domestic legal rules, institutions and processes also influence regulatory autonomy under international trade law. In this sense, while lobbying and domestic interest groups play an important role in directing state’s actions in trade regulation, they are not representative of the totality of relevant domestic influences.
Understanding how domestic institutions interact, therefore, is just as important as studying their role in adhering or rejecting international agreements and deals.21 In the context of the Convention on Biological Diversity, Raustiala notes that the structures of domestic institutions determine the extent to which a country complies with international regimes.22 He coins the term ‘regulatory politics’ to propose that variations in core domestic institutions critically shape the anticipated impact of international regime rules and the domestic politics of international cooperation.23 On one level, domestic institutions operate carrying ideas and expertise that shape state interests and behavior. On another, these structures operate to select and direct the choices that are available to states. As such, international commitments are put into practice by diverse domestic institutions that act in their specific ways to shape and
17 MILNER, supra note 16 18 DOUBLE-EDGED DIPLOMACY: INTERNATIONAL BARGAINING AND DOMESTIC POLITICS (Peter B. Evans et al. eds., 1993); Andrew Moravcsik, Negotiating the Single European Act: National Interests and Conventional Statecraft in the European Community, 45 INT’L ORG. 19 (1991). 19 DAVID BLACK & AUDIE KLOTZ, INTERNATIONAL LEGITIMATION AND DOMESTIC POLITICAL CHANGE: IMPLICATIONS FOR SOUTH AFRICAN FOREIGN RELATIONS (1995); Martha Finnemore, Norms, Culture, and World Politics: Insights from Sociology’s Institutionalism, 50 INT’L ORG 325 (1996). 20 Daniel W. Drezner, Introduction: The Interaction of Domestic and International Institutions, in LOCATING THE PROPER AUTHORITIES: THE INTERACTION OF DOMESTIC AND INTERNATIONAL INSTITUTIONS 6 (Daniel W. Drezner ed., 2003). 21 Arild Underdal, Explaining Compliance and Defection: Three Models, 4 EUR. J. INT’L REL. 5 (1998). 22 Kal Raustiala, Domestic Institutions and International Regulatory Cooperation: Comparative Responses to the Convention on Biological Diversity, 49 WORLD POL. 482 (1997). 23 Id. at 483. page 12 distinguish the local reality of common global commitments.24 Looking at the institutional differences between the UK and the US, Raustiala concludes that the decentralized, adversarial, rules-based American system diverges from the majoritarian, centralized Westminster political system and leads to different private actor behavior, implementation, public regulatory possibilities, and ultimate outcomes. Raustiala concludes that these undervalued domestic variables are central to understanding how and why countries behavior towards the same international regime varies. International, transnational and informal varieties of regulation require states to engage in extensive and often uncertain domestic regulation of different private actors and economic activity.
With this perspective in mind, the case studies in this thesis are first analyzed with a specific focus on the interaction of domestic structures and institutions with trade-related regulations at other levels. The idea in undertaking such a study is to understand how domestic institutions can boost or curb the ability of governments to interact, adapt, and respond to trade regulation. By analyzing how different domestic structures lead to different regulatory preferences and possibilities, this analysis provides an insight into how similar transnational and international rules translate differently into different countries.
2. Corporate Strategies and Global Value Chains
State-led industrial policy has become increasingly complex in times of global markets, fast- paced technological change, and transnational economic governance. The scope for states’ regulatory autonomy is increasingly interlinked to corporate governance and productive processes embedded in global value chains. This Section outlines the role played by law in these transnational economic processes, outlining how law coordinates relationships in global value chains and shapes international economic governance.
To do so, this thesis takes the automotive industry as an example to describe how these relationships are formed and shaped by law. It highlights the way in which the auto industry in the 1990s was influenced not only by changes in trade and investment policies and the globalization strategies of leading companies but also by changes within auto industry value
24 Id. at 489. page 13 chains themselves.25 This was seen in the production processes for the auto industry, where internationalization of production created new patterns of regional and global integration.26
For instance, in Brazil, the automotive manufacturers that arrived in the 1990s were fundamentally different from those of the first surge of auto production in Brazil in the 1950s. Two defining factors marked the new logic of GVCs in the automotive industry in the 1990s.27 The first factor was the integration of developing countries into global auto production systems. Liberalization policies in markets such as ASEAN, China, Eastern Europe, India, MERCOSUR and Mexico attracted transnational auto companies seeking to expand to larger emerging markets for both low-cost production sites (particularly for low- end cars) and for growing markets to offset stagnation in the industrially advanced countries. These regions attracted considerable foreign direct investment (FDI) and transformed the prospects for the structure of the auto industry.28
In Brazil, over half of the investment in the Brazilian industry during the 1990s liberalization reforms aimed at building new industrial installations and was associated with increasing production capability.29 Fiat, Ford, General Motors and Volkswagen, the then established manufacturers, began to build major new productive capacities by 1994-95. After 1994, several new entrants announced plans to set up new plants, including Honda, Mercedes Benz, Peugeot, Renault, and Toyota. Overwhelmingly, assembly companies were interested in the dynamic internal market, the new agreements, and the common market with MERCOSUR and the modernization of specific sector legislation as well as liberalizing policies.30
25 John Humphrey & Olga Memedovic, The Global Automotive Industry Value Chain: What Prospects for Upgrading by Developing Countries, UNIDO SECTORIAL STUD. SERIES, Sept. 2003, http://ssrn.com/abstract=424560. 26 Rhys Jenkins, The Political Economy of Industrial Policy: Automobile Manufacture in the Newly Industrializing Countries, 19 CAMBRIDGE J. ECON. 625 (1995); Daniel T. Jones & James P. Womack, Developing Countries and the Future of the Automobile Industry World Development 13 WORLD DEV. 393 (1985); Rob van Tulder & Winifried Ruigrok, Regionalization, Globalization or Glocalization: the Case of the World Car Industry, in THE IMPACT OF GLOBALIZATION OF EUROPE’S FIRM’S AND INDUSTRIES 22, 22–33 (M. Humbert ed., 1993); Rebecca Morales & Jorge Katz, Presentation to ECLAC/IDRC-UNU/INTECH Conference: Industrial Responses to Liberalization and Increased Competitiveness in Latin American Automobile Industry (Aug. 1995). 27 John Humphrey, Globalization and Supply Chain Networks: The Auto Industry in Brazil and India 3 GLOBAL NETWORKS 121 (2003). 28 Id.at 123. 29 Mariano Laplane & Fernando Sarti, Investimento Direto Estrangeiro e a Retomada do Crescimento Sustentado nos Anos 90, 6 ECONOMIA E SOCIEDADE 143, 161 (1997) (Braz.). 30 Id. at 163. page 14
The second defining factor described by Humphreys was the emergence of global component suppliers who became responsible for designing and delivering component systems at multiple locations around the world.31 In the case of Brazil, there was a significant difference between the industry structure that came to the country in the 1950s and the productive structure that Brazil became a part of in the 1990s.32
When Brazil first established its auto industry in the late 1950s early 1960s, the large auto assemblers in North America and Europe mostly depended on two types of suppliers: contractors (who carried out short, price based contracts to follow specific tasks and instructions of the assemblers) and first-tier suppliers or catalogue suppliers (who produced and designed a catalogue product that was purchased by assemblers). While contractors were available in a larger number and at lower specialization needs, first-tier suppliers were responsible for defining their products and making them available to many different supplier companies (i.e. Bosch, Bendix and Valéo in Europe).33 As these companies internationalized their production in the following decades, new first-tier suppliers were established in each location mostly to respond to regional demands.
During the 1980s-1990s, however, the relationships between assemblers and first-tier suppliers34 were transformed due to the global nature of the assembly and components industries. Laigle pinpoints three main reasons for this change in the relationship in the European context.35 First, the relationship between first-tier suppliers and consumers became closer and strengthened the direct link between consumers’ demands and supplier’s ability to respond to them on a more individualized basis than was possible for the assembler. With this strengthened relationship, first-tier suppliers started moving towards supplying design solutions and capabilities to consumers first-hand. While the assembler still provided overall specifications, the supplier was able to respond to it using its own technology, often adapting
31 Humphrey, supra note 27, at 123. 32 In the 1950s and 1960s, firms’ internationalization strategies were export based and relied on the setting up of a foreign sales network and on a demand for investments in the areas of transport, marketing, and product adaptation. Up to 1990, the internationalization strategy of major European and Asian companies, on which certain builders (such as Fiat and Hyundai) depended, consisted of the promotion of exports to face up to saturation of demand on the domestic market. See Lydie Laigle, Internationalization Strategies and Trajectories of Asian and European Firms, 11 ACTES DU GERPISA 1, 2 (1998) (Fr.). 33 Susan Helper, An Exit-Voice Analysis of Supplier Relations, in MORALITY, RATIONALITY, AND EFFICIENCY: NEW PERSPECTIVES ON SOCIO-ECONOMIES, 355, 355–72 (Richard M. Coughlin ed., 1991); Lydie Laigle, De la Sous-traitance Classique au Co-developpement 14 ACTES DU GERPISA 23 (1995) (Fr.). 34 First-tier suppliers may also be divided into two categories for metholodigical purposes: “Global Mega Suppliers” and “First-tier suppliers.” “Global Mega Suppliers” would hold an even closer relationship with assemblers and extensive global reach. See Humphrey & Memedovic, supra note 25. 35 Laigle, supra note 32. page 15 a basic design to the consumer’s requirements. Second, there was a shift towards the purchasing of complete individual components as opposed to parts of components. This meant that the supplier’s activities became more comprehensive and independently important. In some cases, there was a transfer of part of the assembler’s in-house production to the supplier to enable the manufacturing of complete and independent parts. Third, assemblers became more involved in the specification of production and quality system of their suppliers. With increased importance of “just in time” production systems36 and “quality-at-source” production,37 relatively simple tasks have become of more interest to the assembler. These developments meant that first-tier suppliers acquired a renewed importance in the automotive GVC holding an important middle position in managing the opposite sides of the supply chain and developing its own set of know-how and technological capabilities.
A direct consequence of this change of status within the GVC was the development of transnational relationships between assemblers and first-tier suppliers. This relationship led to a dynamic whereby assemblers developed policies of follow design - reducing design costs and allowed flexible sourcing of cars to different markets. This was later complemented by “follow sourcing,” where large suppliers would follow assembler’s investments abroad38 and would, at times, even act as proxies for their customers in new locations.39
The relationship developed between these different level-producers in a value chain came to determine much of the possibilities for production within the auto industry as well as the options available for countries trying to set up a domestic auto industry. The internal logic of the production chain, as well as relationships between its different level companies, created
36 Just-in-Time (JIT) is a Japanese management philosophy that has been applied in practice since the early 1970s in many Japanese manufacturing organizations. It was first developed and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means of meeting consumer demands with minimum delays. Also known as Toyota Production System (TPS), JIT is a “pull” system of production so actual orders provide a signal for when a product should be manufactured. Demand-pull enables a firm to produce only what is required in the correct quantity and at the correct time. This means that stock levels of raw materials, components, work in progress, and finished goods can be kept to a minimum. This requires a carefully planned scheduling and flow of resources through the production process. JIT migrated to Western industry in the 1980s where its features were put into effect in many manufacturing companies. See EDWARD HAY, THE JUST-IN-TIME BREAKTHROUGH: IMPLEMENTING THE NEW MANUFACTURING (1988). 37 Quality-at-source refers to a lean manufacturing principle which defines that quality output is not only measured at the end of the production line but at every step of the productive process and is the responsibility of each individual who contributes to the production or to the on-time delivery of a product or service. In a practical sense, it would involve each operator checking his or her own work before the part/component or product is sent to the next step in the process. 38 Humphrey & Memedovic, supra note 25. 39 Timothy Sturgeon & Richard K. Lester, The New Global Supply-base: New Challenges for Local Suppliers in East Asia, in GLOBAL PRODUCTION NETWORKING AND TECHNOLOGICAL CHANGE IN EAST ASIA 25 (2004). page 16 significant political, economic, and geographical hurdles for regulating states. The challenge for policy makers and domestic law, therefore, was to internalize the new dynamics in GVC production and to re-conceptualize domestic development projects as to redirect, shape and interact with this new configuration of the industry.
3. International Standards and Regulations
Regulatory processes go hand in hand with scientific progress and interconnectedness of the world economy. In areas marked by technical innovation such as public health and environment, for example, rapid changes commonly lead to the regulation of trademarks, intellectual property rights, labelling and certification, risk and security standards, and other corollaries of scientific progress. Economic globalization thus enhances and intensifies these regulatory processes across jurisdictions.40 Since 1990s, an important proliferation of the international standards and regulations sprang across the Global North.41 National,42 regional,43 and international44 prescriptive regulations applying to the environment, health, and safety imposed requirements on increasingly targeted issues.45
Indeed, such international regulations responded to an increasingly interdependent global economy and recognition of global issues such as the fight against poverty, climate change
40 THOMAS HALE ET AL., GRIDLOCK: WHY GLOBAL COOPERATION IS FAILING WHEN IT’S MOST NEEDED 131 (2013). 41 Philip Aerni, Do Private Standards Encourage or Hinder Trade and Innovation? 13 (Swiss Nat’l Ctr. of Competence in Research, Working Paper No. 18, 2013). 42 See Clean Air Act Amendments of 1990, Pub. L. 101-549, 104 Stat. 2468; Clean Air Act Amendments of 1977, Pub. L. No. 95-95, 91 Stat. 685; Clean Air Act Extension of 1970, Pub. L. No. 91-604, 84 Stat. 1676; Air Quality Act of 1967, Pub. L. No. 90-148, 81 Stat. 485; The Food Safety Act 1990 (Amendment) Regulations 2004, SI 2004/2990; see also Overview of the Clean Air Act and Air Pollution, U.S. ENVTL AGENCY, https://www.epa.gov/clean-air-act-overview (last visited Oct. 15, 2019); Key Regulations, FOOD STANDARDS AGENCY, https://www.food.gov.uk/about-us/key-regulations (last visited Oct. 15, 2019). 43 See, e.g., Regulation (EC) No 882/2004 of the European Parliament and of the Council of 29 April 2004 on Official Controls Performed to Ensure the Verification of Compliance with Feed and Food Law, Animal Health and Animal Welfare Rules O.J. (L 191), 1; Regulation (EC) No 854/2004 of the European Parliament and of the Council of 29 April 2004 Laying Down Specific Rules for the Organisation of Official Controls on Products of Animal Origin Intended for Human Consumption 2004 O.J. (L 226), 83; Regulation (EC) No 852/2004 of the European Parliament and of the Council of 29 April 2004 on the Hygiene of Foodstuffs 2004 O.J. (L 226), 3; Regulation (EC) No 178/2002 of the European Parliament and of the Council of 28 January 2002 Laying Down the General Principles and Requirements of Food Law, Establishing the European Food Safety Authority and Laying Down Procedures in Matters of Food Safety, 2002 O.J. (L 31)1–24; Council Directive 93/119/EC of 22 December 1993 on the Protection of Animals at the Time of Slaughter or Killing, 1993 O.J. (L 340), 21. 44 See, e.g., United Nations Framework Convention on Climate Change, May 29, 1992, 1771 U.N.T.S. 107 (1992) (cooperatively considering what countries-parties to the treaty could do to limit average global temperature increases and the resulting climate change). The treaty sets no mandatory limits on greenhouse gas emissions for its members and contains no enforcement mechanisms but instead provides for updates— protocols—that set mandatory emission limits. The most famous protocol is the Kyoto Protocol, which is particularly relevant for this study. Kyoto Protocol to the United Nations Framework Convention on Climate Change art. 19, Dec. 10, 1997, 37 I.L.M 22 (1998) [hereinafter Kyoto Protocol]. 45 For a historical overview, see Aerni, supra note 41, at 12–13. page 17 mitigation, loss of biodiversity, and others. Traditional governance methods that rely on public international law are increasingly complemented by market-driven, private, hybrid, transnational arrangements. In the absence of an enforceable system of global justice, voluntary and market-based regulation became an important approach, promoted by activists, consumers, investors, and even the UN alike. 46 However, what appears to emerge from such developments is a sort of integration of societal objectives through the market and by market. More precisely, particular technical bodies of knowledge became one of the main instruments of assessing a given state public interest regulation’s validity against the background of its efficiency for the ‘healthy’ functioning of the market.
The ways in which such regulations and standards propagate across the globe have been the object of extensive research in international governance.47 Nevertheless, the extent to which these structures constrain or direct choices of national states is still unclear given that any trend in convergence or divergence of policies ‘are neither universal nor uniform, variation occurs from issue area to issue area.’48 Though these exact pathways aren’t always constant, there is little doubt that international factors play an important role in accounting for cross- national policy convergence.49 Though it may occur for many different reasons, Holzinger et al account for three main ways in which this process occurs: international harmonization, transnational communication and regulatory competition.50
First, international harmonization refers to the existence of interdependencies or externalities that push governments to resolve common problems through cooperation within international
46 Ludo Cuyvers & Tim De Meyer, Market Driven Promotion of International Labour Standards in Southeast- Asia: The Corporatization of Social Justice, in PRIVATE STANDARDS AND GLOBAL GOVERNANCE 114 (Alex Marx et al. eds., 2012). 47 Amitav Acharya, How Ideas Spread: Whose Norms Matter? Norm Localization andIinstitutional Change in Asian Regionalism, 58 INT’L ORG. 239 (2004); Zachary Elkins et al., Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000, 60 INT’L ORG. 811 (2006); Katharina Holzinger et al., Environmental Policy Convergence: The Impact of International Harmonization, Transnational Communication, and Regulatory Competition, 62 INT’L ORG. 553 (2008); Chang Kil Lee & David Strang, The International Diffusion of Public-Sector Downsizing: Network Emulation and Theory-Driven Learning, 60 INT’L ORG. 883 (2006); David Levi-Faur, The Political Economy of Legal Globalization: Juridification, Adversarial Legalism, and Responsive Regulation, 59 INT’L ORG. 451 (2005). 48 Miles Kahler & David A. Lake, Globalization and Governance, in GOVERNANCE IN A GLOBAL ECONOMY: POLITICAL AUTHORITY IN TRANSITION 1, 2 (Miles Kahler & David Lake eds., 2003). 49 Policy convergence can be understood as any increase in the similarity of a certain policy across jurisdictions. Holzinger et al., supra note 47, at 556; see also Katharina Holzinger & Christopher Knill, Causes and Conditions of Cross-national Policy Convergence, 12 J. EUR. PUB. POL’Y 775 (2005); Beth A. Simmons et al., Introduction: The International Diffusion of Liberalism, 60 INT’L ORG. 781 (2006); Beth A. Simmons & Zachary Elkins, The Globalization of Liberalization: Policy Diffusion in the International Political Economy, 98 AM. POL. SCI. REV. 171 (2004). 50 Holzinger et al., supra note 47, at 556–60. page 18 institutions and hence sacrifice some independence for the good of the community.51 For instance, under the WTO’s TBT Agreement52, governments are required to adopt international standards wherever feasible, including ISO standards.53 One consequence is that businesses, and even governments as trading parties, can make adherence or certification/registration under ISO standards mandatory - or at least, an important condition of trade with a foreign business.54 A possible intended result perhaps is a globally harmonized management system in which there are no barriers to international trade in the form of national standards diverging from international standards.55
Second, transnational communication among frequently interacting organizations, such as national bureaucracies, tends to develop similar structures, concepts, understandings, and epistemic communities over time.56 In this scenario, policy convergence results from organizations striving to increase their social legitimacy by adopting forms and practices valued within the broader institutional environment and transnational networks. Aspects of emulation and lesson drawing of successful practices may also play an important role.
Third, regulatory competition among institutions and jurisdictions suggests that countries adjust regulatory standards to cope with competitive pressures emerging from international economic integration. The pressure arises either from threats of economic actors shifting their activities elsewhere or from internal lobbying by industries, emphasizing the competitive disadvantages that domestic firms suffer through strict and costly environmental regulation.57
Processes of harmonization, transnational communication and regulatory competition are present in the case of the auto industry. Car emission standards and fuel efficiency standards, as well as other environmental policies, are examples of races to the top with regards to product standards. In these cases, theories of regulatory competition predict convergence among countries exposed to competitive pressures, regardless of the regulatory level at which
51 George Hoberg, Globalization and Policy Convergence: Symposium Overview, 3 J. COMP. POL’Y ANALYSIS 127 (2001). 52 Agreement on Technical Barriers to Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 120. 53Id. at art. 2.4; see also id. at art. 4, Annex 1.2, Annex 3C. 54 Dave Bennett, ISO and the WTO: A Report to the International Confederation of Free Trade Unions’ Working Party on Health, Safety and Environment, 11 NEW SOLUTIONS 197, 198–99. 55 Id. 56 Paul DiMaggio & Walter Powell, The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, in THE NEW INSTITUTIONALISM IN ORGANIZATIONAL ANALYSIS 63 (Paul DiMaggio & Walter Powell eds., 1991). 57 Holzinger et al., supra note 47, at 560. page 19 this convergence might occur.58 The more a country is exposed to competitive pressures, the more likely its policies will converge to those of states with more international exposure. The regulation of car exhaust emissions has followed this pattern since the introduction of the catalyst car in 198959. When California raised its emission standards, most US states followed quickly in order not to lose the market in California.60 A similar process has been observed in the EU.61
The importance of standards and countries tendency for regulatory convergence is particularly strong in the global auto industry where less than ten countries account for almost the total production of motor vehicles (China, Korea, India, Brazil, Mexico, USA, Japan, Germany, France, and the UK). This approach will attempt to outline the importance these standards had on the regulation of the auto industry during its liberalization years in the 1990s as well as in the post-financial crisis period post 2007-2009.
B. DISTRIBUTIVE PERSPECTIVES ON POLICY SPACE
The notion of international law is closely intertwined with the idea of sovereignty. Definitions of sovereignty describe how the international system is governed, who holds power, who decides about power, and who can contest decisions about power.62 It denotes the international legal status of a State that is not subject, within its territorial jurisdiction, to the governmental, executive, legislative, or judicial jurisdiction of a foreign state or to foreign law other than public international law.63 Fundamentally, a sovereign entity can decide and administer its own laws and exert its authority over its territory, people, and politics. 64 Crawford adds, “sovereignty does not mean freedom from the law, but freedom within the law, including the freedom to seek to change the law.”65
58 Id. at 560–61. 59 See Katharina Holzinger, A Success in EU Environmental Policy: The Small Car Exhaust Emission Directive of 1989, in SUCCESSFUL ENVIRONMENTAL POLICY: A CRITICAL EVALUATION OF 24 CASES, 187 (M. Jänicke & H. Weidner eds., 1995). 60 DAVID VOGEL, TRADING UP: CONSUMER AND ENVIRONMENTAL REGULATION IN A GLOBAL ECONOMY XX (Harvard University Press 1998) (1995). 61 CHRISTOPH KNILL & DUNCAN LIEFFERINK, ENVIRONMENTAL POLITICS IN THE EUROPEAN UNION: POLICY- MAKING, IMPLEMENTATION AND PATTERNS OF MULTI-LEVEL GOVERNANCE (2007); see also Holzinger, supra note 59. 62 David Kennedy, Sovereignty: Responding to Anghie and Aravamudan, 41 TEX. INT’L L.J. 465 (2006). 63 Helmut Steinberger, Sovereignty, in 10 ENCYCLOPEDIA OF PUBLIC INTERNATIONAL LAW 414 (Rudolf Bernhardt & Max Planck Inst. for Comparative Pub. Law & Int’l Law eds., 1987). 64 JOHN H. JACKSON, SOVEREIGNTY, THE WTO, AND CHANGING FUNDAMENTALS OF INTERNATIONAL LAW (2006). 65 James Crawford, Sovereignty as a Legal Value, in THE CAMBRIDGE COMPANION TO INTERNATIONAL LAW 117, 122 (James Crawford & Martti Koskenniemi eds., 2012). page 20
Insofar as sovereignty describes the power of autonomous States, it also describes the extent to which such States choose to relinquish this power in favor of international norms, organizations, and treaties. In essence, the very contour of international law can be drawn from the constant tension contained in the notion of sovereignty: states must be capable of binding themselves if international law is to exist, and also incapable of binding themselves through international law if they are to be independent.66 That is to say, although sovereignty does not require absolute independence from external constraints, it would also be lost if the State is subject to too many external constraints.67
Within this paradox, the content of the concept of sovereignty has changed throughout the history of international law. From the old Westphalian idea of states ‘right’ to monopolize power regarding their territory and persons to Vattel’s “a dwarf is as much a man as a giant”68 symbolizing the inherent sovereign equality of nations “a small republic is no less a sovereign state than the most powerful kingdom.”69 In the tradition of 19th century positivism, sovereignty became characterized as the structuring characteristic of the ‘civilized,’ a notion that evolved to play a major role in the post-colonial 20th century and on the United Nations framework defining sovereignty as “non-intervention in matters which are essentially within the domestic jurisdiction on any state.”70
This broad-brush description of sovereignty in international law is an entry point to explore how countries’ sovereignty is manifested within the economic sphere of the international regime. States’ regulation of economic policy is curtailed by several factors that go beyond international law: an increasingly interconnected global economy, multinational corporations, sophisticated production chains, macroeconomic and exchange-rate policies, specific market and sector conditions as well policy decisions taken in other countries.71 Nonetheless, since the legalization of an international economic law regime in the post-war years, international law became an additional variable in the mix.
Specifically, in international trade law, States’ sovereignty to enact economic policy now also answered to the rules espoused in the GATT and later on in the WTO. The relationship
66 Samantha Besson, Sovereignty, International Law and Democracy, 22 EUR. J. INT’L L. 373 (2011). 67 Timothy Endicott, The Logic of Freedom & Power, in THE PHILOSOPHY OF INTERNATIONAL LAW, 245, 252 (Samantha Besson & John Tasioulas, eds., 2010). 68 See Crawford, supra note 65, at 117. 69 Id. 70 U.N. Charter art. 2, para. 7. 71 Mayer, see note 100. page 21 between the autonomy to regulate for economic development and the rules of the international trading system became a hot topic since the establishment of the system. Though much has been said on the relationship between world trade rules and State sovereignty,72 this Section explores how the same legal framework necessarily results in different distributive consequences to different countries and actors within the system. It makes the case that trade law has operated to naturalize some economic ideals as opposed to others and that, the notion of policy space fails to convey the more specific goal of institutional neutrality and deeper disparities among players in the system.
As a first aspect of regulatory autonomy, the Section applies the critical legal notion of ‘dynamic of differences’73 to suggest that there is a qualitative difference between the formal room for economic policy available to states under trade agreements and how each state experiences or benefits from these regulatory possibilities. This Section explains that this idea is linked to the existence of different institutional arrangements that were not internalized by the post-war system. As such, by pushing different institutional arrangements into an idealized institutional model, the Section juxtaposes the idea of policy space to that of institutional neutrality to describe how countries experience constraints imposed by international trade rules.
Second, the Section offers a brief overview of what policy space has meant within the institutional constraints of the system. By offering a timeline of different notions of economic policy and of markets that were (and are) at play, the Section illustrates how the uniform application of the law has translated into different qualitative experiences for countries in different stages of development. As such, it uses the idea of ‘dynamic of differences’ to give examples of how the lack of institutional neutrality creates and maintains different power relationships within the global trading system.
Third, the Section offers a constructive approach to economic rationality by mapping how law plays a fundamental rule in shaping the market and its players. Looking at the role of expertise in normalizing economic ideas and translating them into acceptable and non- acceptable policies, it explores the techniques and practices of experts operating in the background of trade politics. The Chapter provides a framework to explain how experts exert
72 JACKSON, supra note 64. 73 Antony Anghie, Colonialism and the Birth of International Institutions: Sovereignty, Economy, and the Mandate System of the League of Nations, 34 N.Y.U. J. INT'L L. & POL. 513 (2002). page 22 their profession under the veil of technical expertise while ultimately drafting the limits and the solutions to key international trade questions.
The three approaches described in this Section provide a theoretical basis to show that the notion of regulatory autonomy hides power struggles that take place on a daily basis. The idea of regulatory autonomy, symbolized by the notion of policy space, internalizes ideas exclusively from one narrative about the trading system. This uncontested internalization of a specific story about economic relations reinforces the legitimacy of the system and distances the work of experts from the distributive consequences of the rules and practices that guide their work.74
1. Policy Space and the Dynamic of Differences
“Legal interpretation takes place in a field of pain and death. Legal interpretive acts signal and occasion the imposition of violence upon others: a judge articulates her understating of a text, and as a result, somebody loses his freedom, his property, his children, even his life. Interpretations in law also constitute justifications for violence which has already occurred or which is about to occur. When interpreters have finished their work, they frequently leave behind victims whose lives have been torn apart by these organized, social practices of violence. Neither legal interpretation or the violence it occasions may be properly understood apart from one another.”75
As a condition of existence, a system of law needs to describe, categorize, and formalize the relationships it attempts to regulate. As Robert Cover famously announced in “Violence and the Word,” imagining desirable relationships between communities and governments is inherently an act of violence. It implies that some views will prevail over others, and some communities will overshadow others. Societal ordering, therefore, comes from the formalization of communal relationships with conflicting perspectives. Thus, while there can be no lasting harmony, there also cannot be lasting anarchy. Somewhere between these two extremes, the law must seek to nurture the communities overshadowed and offer the possibility of redemption through the glimpses of different realities arising within the system.76
74 SUSAN STRANGE, STATES AND MARKETS 18 (Bloomsbury Revelations 2015) (1988); see also Joost Pauwelyn, At the Edge of Chaos? Foreign Investment Law as a Complex Adaptive System, How it Emerged and How it Can Be Reformed 29 ICSID REV. 372, 375–76 (2014) (similarly arguing that investment law is a “spontaneous order emerging from decentralized interactions”). 75 Robert Cover, Violence and the Word, 95 YALE L.J. 1601, 1601 (1986). 76 Martha Minow, Introduction to ROBERT COVER, NARRATIVE, VIOLENCE, AND THE LAW: THE ESSAYS OF ROBERT COVER 5, 7 (Martha Minow et al. eds., 1995). page 23
This constituent element of the law is crucial to understand the complexity of factors that dictate how countries interact within an international system of rules. The flexibility and contingency of concepts within the law and the possibilities of legal interpretation come to define and justify acts of violence and redemption within a system. This perspective is useful to understand how the idea of sovereignty and States’ regulatory autonomy has developed in international law and international economic law, sustaining historical disparities in possibilities of action within and among states.
The post-war years and the breakdown of European colonial relationships in Asia, Africa, and in the Americas illustrate how this duality is intrinsic to contemporary international law. The decolonization process brought large numbers of former European colonies to join the newly created international system. New nations were now recognized as ‘sovereign’ by their former European colonizers, a title bestowed upon them to lay the foundations for a universal liberal order.77 The liberality of international law lay in the extension of formal equality to all despite wide disparities in the real power of supposedly equal sovereign states.78 Formal equality under international law, therefore, legitimated the post-WWII order and reaffirmed its aspiring values of a universal, open, and cosmopolitan international community. The legitimacy of the system arose from the fact that law attributed formal equality to all nations, despite wide disparities in the real power of supposedly equal sovereign states.79
In practice, however, sovereignty did not mean the same for all countries. International law reproduced (and continues to reproduce) a ‘dynamic of difference’ that characterized colonial relationships.80 The idea of a ‘dynamic of difference’ explains the institutionalization of a universal and uniform international system that empowers certain practices while suppressing others. For instance, while the sixteenth and seventeenth centuries’ naturalist international law asserted that international law derived from human reason applied to all peoples; positivist international law in the nineteenth century distinguished between civilized states and non-civilized states.81 In this sense, international law applied only to the sovereign states
77 Anghie, supra note 73. 78 Id. at 514. 79 Id. 80 ANTONY ANGHIE, IMPERIALISM, SOVEREIGNTY AND THE MAKING OF INTERNATIONAL LAW (2007). 81 See THOMAS ALFRED WALKER, A HISTORY OF THE LAW OF NATIONS: VOL. 1 FROM THE EARLIEST TIMES TO THE PEACE OF WESTPHALIA, 1648 (Adamant Media Corp. Press 2006) (1899); C. H. Alexandrowicz, Doctrinal Aspects of the Universality of the Law of Nations, 37 BRIT. Y.B. INT’L L. 506 (1961). page 24 which comprised the civilized ‘family of nations,’ reaffirming the link between positivism and colonialism.82
The concept of sovereignty was thus based upon the implicit idea of membership of a society. Only those states accepted into this membership, with agreed cultural, behavioral, and racial principles, could be regarded as belonging to society.83 As such, nineteenth-century positivism not only established the legal framework that dealt with international disputes but, defined the vocabulary, constraints, and considerations that shaped the sovereignty doctrine.84
In this context, non-European societies faced the fundamental contradiction of having to comply with authoritative European standards to win European recognition. For non- Europeans, the achievement of sovereignty was an ambiguous development as it involved alienation through the internalization of European preoccupations as opposed to the individual affirmation of their identity.85 The colonial origins of international law, therefore, maintain this struggle in a set of structures that repeat themselves at various stages in the history of international law.86
The colonial encounter had a continuing effect on the innovations and reforms during the post-war period and served to reproduce inequalities and power disparities that had characterized formal colonialism. According to Anghie, the logic of ‘dynamic of differences’ was repeated in the creation of the Mandate System and in the Third World’s attempt to use their sovereignty to create a New International Economic Order (NIEO) during the seventies.87 Both of these campaigns, according to him, illustrate the limitations of Third World sovereignty insofar as these countries were not able to deploy their autonomy to reveal or remedy their colonial past. That is to say, insofar as sovereignty also refers to freedom within the law and the freedom to seek to change the law, some countries can exercise this freedom more and better than others.88
In this respect, international law is built on a constant duality of experiences: a formal attempt at a universal liberal order and real translated effect on different countries and communities
82 ANGHIE, supra note 80, at 35–37. 83 Id. at 45. 84 Id. at 40. 85 Id. at 103. 86 Id. at 3. 87 Id. at 199. 88 Crawford, supra note 65, at 122. page 25 under the same legal system. Though this argument may at times be circular – leading to the inescapable realization that any system of law will operate based on classification and distinctions – it nevertheless points to the conclusion that this logic needs to be accounted for. As Cover would put it, the communities threatened by ‘the word’ need to be offered the possibility of redemption through law.
The establishment of the Bretton Woods Institutions during the post-war years followed the same logic.89 As the United States and the United Kingdom worked to forge a system to respond to their post-war economic needs, their concerns overrode the possibilities, and room for experimentation that might have been needed by other countries. What this meant, effectively, was the denial of the multiplicity of historical needs, economic and institutional preferences, cultural and societal challenges faced by most countries. As countries voluntarily joined a system of international rules, they also signed up for a system of values and standards that was essentially alien to them. Their need to be included in the post-war international economic regime overlooked how this new rulebook would affect their chance to join the international community in their individuality, history, and preferences. Anghie narrates:
The ‘right to trade’ and the assessment of non-European government in terms of its recognition of the right to trade has been a continuous theme of the discipline. When companies such as the British East India Company, exercising sovereign rights, administered the territories of non-European peoples, they established systems of law and governance that were directed at furthering the commercial relations that were the very sine qua non of their existence. Commerce and governance were not merely complementary but identical: a corporation exercised the power of government. The governance of non-European territories was assessed principally on the basis of whether it enabled Europeans to live and trade as they wished.90
Joining this system was a “relative development” for newly independent countries given that it was formed by alien standards, values, economic ideology, and ideals of law not coincidental to their own. Developing countries were buying into a system of formally identical rights and obligations, developed between the United States and the United Kingdom that would freeze their economic relationship and create de facto different real
89 In examining the Mandate System, Anghie argues that non-European sovereignty was “less sovereign” than European sovereignty given the lacking in real economic power and dependency on developed countries. See ANGHIE, supra note 80, at 199. These questions were also addressed by prominent Western and non-Western jurists of the period, including Friedmann and Elias, Jenks, Roling and Anand, Fatouros, Abi-Saab and Castenada, McDougal and Falk. 90 ANGHIE, supra note 80, at 252. page 26 possibilities within and across different countries.91 The antagonism between developed and developing countries emanated from a ‘dynamic of differences’ that continues to provide the impetus for international law and institutions to follow practices they believe will bring development and alleviate poverty for those on the negative side of the ‘dynamic of differences.’92
The application of the concept of ‘dynamic of differences’ to the international trading system suggests that the idea of regulatory autonomy and policy space is yet another manifestation of the duality between formal and real sovereignty in international law. Case in point, the notion of policy space blurs preexisting power relations that shape the contours of state action and the operation of law in different regulatory levels as essential aspects of the colonial relationship have remained unchanged. As a consequence of Anghie’s argument, not all states experience policy space alike. This is because of international law and institutions rather than despite international law and institutions.93 This distinction is the result of the continuing effect of the colonial encounter and the persistence of the structure of the civilizing mission that has created this discrepancy.94
Talks of development and, consequently, of policy space at the WTO became equated with an agreement on policies that allegedly favored developing countries, through better market access for their goods in rich countries, and the removal of export and other subsidies by rich countries for their agricultural exports. This narrative failed to acknowledge the plurality of means and ends, which are subjects of intense disagreement in the field of development.95 Recovering this politics, including within the notion of policy space, is an essential step
91 Id. at 18. 92 Id. at 267. 93 Anghie, supra note 73, at 519; see also EDWARD SAID, CULTURE AND IMPERIALISM 66 (First Vintage Books 1994) (1993) (applying the same logic when raising issues with “regard[ing] imperial concerns as constitutively significant to the culture of the modern West”). 94 Drawing upon literature from development economics, this case is defended by many authors. Robert Hunter Wade, for instance, argues that the international trading regime operates more to expand the options of developed country firms to enter markets and to take appropriation of technological rents. For him, the WTO system it has required governments to regulate more and in favor of a particular set of global players. Moreover, these agreements have been developed to be vague where it benefits developed countries and precise at points where precision works against developing countries: it centered in the manners in which WTO-compatible industrial policy consists of measures that correspond to the needs of advanced, manufacturing intensive economies. See Ha-Joon Chang, Kicking Away the Ladder: Infant Industry Promotion in Historical Perspective, 31 OXFORD DEV. STUD. 21 (2003); Wade, supra note 100; Linda Weiss, Global Governance, National Strategies: How Industrialized States Make Room to Move Under the WTO, REV. OF INT’L POL. ECON. 723 (2005). 95 An example of this that virtually none of the late developers followed any of the conventional wisdom about development to achieve what they did, including by establishing ‘institutions’ first. ALICE AMSDEN, The Rise of the” Rest”: Challenges to the West from Late-industrializing Economies (2001). page 27 towards assessing the relative merits and demerits of legal and institutional reforms. The use of the term policy space, through the institutionalized notion of development in the trading system cannot serve as a proxy for distributional issues in international law, as is often assumed; rather, what is needed is an unpacking of the politics behind the idea of policy space for development itself.96
2. Institutional Preferences and Global Distributive Consequences
Over the past decades, the notion of policy space has become an important catchphrase in international trade law. As developing countries gained space under the GATT, a common sentiment of dissatisfaction emerged. These countries felt that the system’s economic choices did not fully reflect their preferences. They claimed that their best interests were not taken into account or incorporated within the GATT structure. Gradually, the international trading system acquired almost universal membership and became composed by a majority of developing countries.
In this context, narratives for alternative visions of economic policy arose in developing countries during the seventies. New perspectives questioned the array of economic choices legally codified in the GATT. Historic, developmental, and structuralist approaches to economic policy emerged in different forums as counter-narratives to some of the ideas contained in the GATT model for economic growth. Following the ideological mindset of the New International Economic Order (NIEO),97 the United Nations Conference on Trade and Development (UNCTAD) approved the Charter of Economic Rights and Duties of States in 1972. In Article 2 of Chapter II, it stated “a nations right to regulate and exercise authority over foreign investment in accordance with its laws and regulations.”98 It further acknowledged parties’ rights to regulate the activities of transnational corporations within their national jurisdictions, ensuring that their activities conformed with domestic laws and interests. 99 This substitute storyline envisioned a world were countries were entitled to experiment with different state-market recipes. Where they would be free to implement policy experiments they deemed more appropriate for their nation’s development. These
96 Balakrishnan Rajagopal, Counter-hegemonic International Law: Rethinking Human Rights and Development as a Third World Strategy, 27 THIRD WORLD Q. 767, 777 (2006). 97 ROBERT ROTHSTEIN, GLOBAL BARGAINING: UNCTAD AND THE QUEST FOR A NEW INTERNATIONAL ECONOMIC ORDER (2015). pp. 33-35. 98 G.A. Res. 3281(XXIX) art. 2, Charter of Economic Rights and Duties of States (Dec. 12, 1974). 99 Id. page 28 accounts yielded a common, powerful rhetorical tool: the idea of regulatory policy space for developing countries.100
This Section looks at three moments in which the contour of the term regulatory autonomy within the trading system shifted to define what was acceptable or unacceptable trade-related economic policy. 101 First, the defining divide during the preparatory discussions for the ITO and the impulses behind the parallel drafting of the GATT. Second, the push by developing countries for non-reciprocity in the 1950s and 1960s and; third, the establishment of waivers and exceptions for developing countries during the Tokyo Rounds. The Section shows that, though these three moments attempted to change the legal framework of the trading system to allow for more diverse regulatory options, they did so in a way that did not alter the underlying pathway for development as the ‘correct’ economic trajectory.
a. The ITO and the GATT Negotiations: Policy Space as an Anglo Bargain
During the aftermath of World War II, the American and the British worldviews politicized the world economy.102 On one side of the Atlantic, Cordell Hull, the US Secretary of State, had a free-trade oriented mind-set. He combated widespread protectionism, beggar-thy- neighbour policies such as the Smoot-Hawley Tariff Act of 1930, exchange control devaluations and nationalization of foreign property. 103 His persistence led to the enactment of the Reciprocal Bilateral Trade Agreements Act by the US Congress in 1934.104 On the other side of the Atlantic, the British were interested in a more complex system of economic governance that would address free-market instability and unemployment. 105 Based on the 1930s and 1940s works of Meade and Keynes, their idea was to build a multilateral
100 KEVIN GALLAGHER & ALICE H. AMSDEN, PUTTING DEVELOPMENT FIRST: THE IMPORTANCE OF POLICY SPACE IN THE WTO AND IFIS, ZED BOOKS (2005); Ha-Joon Chang, Policy Space in Historical Perspective with Special Reference to Trade and Industrial Policies, 41 ECON. & POL. WKLY. 627 (2006); Bernard M. Hoekman, Operationalizing the Concept of Policy Space in the WTO: Beyond Special and Differential Treatment, 8 J. INT’L ECON. L. 405 (2005); Jörg Mayer, Policy Space: What, for What, and Where?, 27 DEV. POL. REV. 373 (2009); Suzanne A. Spears, The Quest for Policy Space in a New Generation of International Investment Agreements, 13 J. INT’L ECON. L. 1037 (2010); Robert Hunter Wade, What Strategies Are Viable for Developing Countries Today? The World Trade Organization and the Shrinking Of ‘Development Space,’ 10 REV. INT’L POL. ECON. 621 (2003); Kenneth C. Shadlen, Policy Space for Development in the WTO and Beyond: The Case of Intellectual Property Rights (Tufts Univ. Glob. Dev. & Env’t Inst., Working Paper No. 05-06, 2005). 101 LANG, supra note 2, at 190-271. 102 Id. at 190. 103 ERNST-ULRICH PETERSMANN, CONSTITUTIONAL FUNCTIONS AND CONSTITUTIONAL PROBLEMS OF INTERNATIONAL ECONOMIC LAW 33 (1991). 104 CORDELL HULL, ECONOMIC BARRIERS TO PEACE: ADDRESSES ON THE OCCASION OF THE PRESENTATION OF THE WOODROW WILSON MEDAL TO THE HONORABLE CORDELL HULL 4 (Woodrow Wilson Founda., 1937). 105 LANG, supra note 2, at 194. page 29
Commercial Union for trade to stabilize world demand through buffer shocks of primary products106 and an International Clearing Union to structure the post-war financial system.107
United States’ Economic Policy Preference
Free Trade, No Government Intervention, Investment Protection, Floating Exchange Rates = Economic prosperity and Development
✖
United Kingdom’s Economic Policy Preference
Free Trade, Stabilization of Global Demand, Structured Financial System, Buffers for Market Stability and Unemployment = Economic prosperity and Development
The two different approaches contrasted to the point that Keynes would dismiss Cordell Hull’s fascination with free trade as “lunatic proposals,”108 and vice-versa. Nevertheless, the two perspectives found common ground after World War II with the US embrace of the British perspective109 in what became known as the ‘embedded liberalism compromise.’110 The convergences and divergences of this bargain111 were reflected in the US Proposals of 1945 for an International Trade Organization, and the idea of economic prosperity imprinted in this document was as follows: 112
Make real the principle of equal access to the markets and the raw materials of the world, so that the varied gifts of many peoples may exert themselves more fully for the common good. The larger purpose is to contribute to the effective partnership of the United Nations, to the growth of international confidence and solidarity, and thus to the preservation of the peace.113
106 Martin Daunton, A Tale of Two Conferences – the International Trade Organization, GATT and World Trade, in IS FREE TRADE FAIR TRADE? NEW PERSPECTIVES ON THE WORLD TRADING SYSTEM 34, 37 (Frank Trentmann ed., 2009). 107 LANG, supra note 2, at 194. 108 Id. 34. 109 James N. Miller, Bard Coll., Paper Presented to the 25th Meeting of the Eastern Economics Association: The Pursuit of a Talking Shop: Political Origins of American Multilateralism 1934–1945 (Mar. 1999). 110 John Ruggie, International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, 36 INT’L ORG. 379(1982). 111 See John Ikenberry, A World Economy Restored: Expert Consensus and the Anglo-American Post-war Settlement, 46 INT’L ORG. 289(1992); see also ROBERT HUDEC, DEVELOPING COUNTRIES IN THE GATT LEGAL SYSTEM (2010). 112 U.S. DEP’T OF STATE, PUB. 2411, PROPOSALS FOR THE EXPANSION OF WORLD TRADE AND EMPLOYMENT 11 (1945), http://www.worldtradelaw.net/misc/ProposalsForExpansionOfWorldTradeAndEmployment.pdf.download. 113 Id. at 7. page 30
The US Proposals of 1945 make it clear that a stable international economic framework was the key requirement for raising global standards of living and progress. US efforts aimed to achieve “approximately full employment by the major industrial and trading nations” as a necessary condition to “the expansion of international trade on which the full prosperity of these and other nations depends.”114 As such, there was a hierarchy in the goals of the trading system: varying from “major industrial and trading nations” to “other nations” that were seen as dependent upon the former.
The US Proposals set out a clear causal relationship between the idea of “progress,” “freedom from want,” and “excessive restrictions on exchange and redistribution.”115 According to the document, “progress” would require the release from “restrictions imposed by the government, restrictions imposed by private companies and cartels, fear of disorder in the commodity markets, irregularity (or the fear thereof) in production and employment. Hudec explains that the “developing country problem” was relatively novel at that time and did not serve as a historical reference point to reorient the goals of the trading system.116 He argues:
Not only was there no Golden Age to point towards as a goal but, perhaps more important, there had been no past failures that could serve as a lesson about what not to do – nothing resembling the lesson that developed countries had been taught by the beggar-thy-neighbour policies of the 1930s. Individual governments, no doubt had ideas, even convictions, about what would work and what would not work, but there was no collective experience.117
Hudec’s understanding reflects the logic of ‘zeroing’ developmental experiences previous to 1939. He states, “before 1939, the organizing principle for rich-poor relationships had been colonialism” and that the world required a “clean start” and a “completely new departure.” This ahistorical approach ignores the central role played by trade in colonial relations as well as it ignores the patterns that the newly created trading system ended up prolonging.118 This meant that the patterns of production and division of production and consumption would not be directly addressed under this new system. Interestingly, early discussions treated colonialism as the antonym of development,119 meaning that the discourse of development
114 Id. 115 Id. at 2. 116 HUDEC, supra note 111. 117 Id. at 19. 118 See GILBERT RIST, THE HISTORY OF DEVELOPMENT: FROM WESTERN ORIGINS TO GLOBAL FAITH 52 (4th ed. 2014). 119 Nicolas Lamp, Lawmaking in the Multilateral Trading System 128 (Sept. 2013) (unpublished PhD dissertation, The London School of Economics and Political Science) (on file with The London School of Economics and Political Science), http://etheses.lse.ac.uk/796/1/Lamp_Lawmaking_Multilateral_Trading_System.pdf. page 31 did not problematize the colonial past of almost all “developing” participants in international trade law-making in the same way that the US narrative dramatized the protectionism of the inter-war years.120
US 1945 Proposal’s Economic Policy Preferences
No Restrictions on Exchange and Distribution, Free Trade, Full Employment in major Industrial/Trading Nations, Progress, Freedom from Want =
Economic Prosperity and Development
Though the US Proposals never addressed the problem of development space for less- developed countries, the matter was considered in the preparatory negotiations for the Draft Charter of the International Trade Organization. 121 Developing country members spoke out against the type of economic regulations and the provisions of the London and New York Drafts, such as tariffs, subsidies, quantitative restrictions, and state trading companies. Developed and developing country groups desired international control of some things and not of others. The controversy was related to which trade restrictions would be subject to greater international control and which would not.122
It was clear to participants that throughout the Charter, there was a conflict among countries regarding the means for achieving two of its purposes: the removal of trade barriers, on one hand, and the promotion of the industrial development of the undeveloped countries on the other.123 While developed countries largely defended the London and New York drafts, developing countries saw it as a “freezing the actual economic status of the different countries of the world.”124 They understood that there was “real danger that the industrial development
120 Id. at 128. 121 The First Session of the Preparatory Committee was held in London from October 15 to November 26 of 1946. During the Session, a draft Charter for an International Trade Organization was prepared and embodied in a report which was distributed as document E/PC/T/33 and published. See U.N. Conference on Trade and Employment, Report of the First Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, U.N. Doc. E/PC/T/33 (Oct. 31,1946) [hereinafter First Session]. 122 JOHN HOWARD JACKSON, WORLD TRADE AND THE LAW OF GATT: A LEGAL ANALYSIS OF THE GENERAL AGREEMENT ON TARIFFS AND TRADE 637 (1969). 123 U.N. Conference on Trade and Employment, Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment: Verbatim Report, Twenty-Sixth Meeting of Commission A, 3, U.N. Doc. E/PC/T/A/PV/26 (July 5, 1947) [hereinafter Twenty-Sixth Meeting of the Second Session]. 124 U.N. Conference on Trade and Employment, Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment: Verbatim Report, Twenty-Second Meeting of Commission A, 44, U.N. Doc. E/PC/T/A/PV/22 (July 1, 1947) [hereinafter Twenty-Second Meeting of the Second]. page 32 of the under-industrialized countries will be sacrificed at the altar of free trade.”125 The Indian delegation alerted that the UK and the US’ main concern
“is not primarily one of expansion or development but of preservation of the levels of production and employment which have already been attained. Exports on an ever-increasing scale, rather than internal development, are the primary objective of both. Little concern was shown for the problems facing an underdeveloped country which might find it necessary to apply such restrictions or regulatory devices for the development of its resources.”126
India defended that “direct regulation and control of trade must, therefore, be accepted as an integral part of a system of planned economic development.” It argued that the “power to impose” protective tariffs, subsidies, quantitative tariffs, and state monopoly must be retained for the actual method of regulation will depend on the circumstances of each industry. Additionally, it asserted that trade should only be a goal insofar as it is not an end in itself, but a subordinate element of national economic policy. It follows that commercial policy must be determined, not based on preconceived principles, but in the light of each country's actual requirements.127 National needs differ, and it is wrong to assume that “release from restrictions imposed by governments” will prove of benefit to every country.128
“The Cuban delegation argued that if no more liberty to regulate was given to developing countries, agricultural countries would continue to be agricultural; monopoly countries would continue to be monopolies, and the more developed countries “would continue selling typewriters and radios, etc. to those nations that were trying to produce the primitive tools.”129
Besides the choice of regulatory instruments, countries at the Preparatory Conferences also expressed concern with the continuity of labor divisions within the trading system and selective market access that would be only beneficial to developed countries. Developing countries including India, China, Australia and Canada (self-designated developing countries at the time), Cuba among others manifested concern with the protection of agricultural products by developed economies.130 China expressed:
“the London compromise granted advantages to industrial countries - those countries which were already highly developed - and enabled them to impose the necessary restrictive
125 Twenty-Sixth Meeting of the Second Session, supra note 123, at 4. 126 International Conference on Trade and Employment, Preparatory Committee of the International Conference on Trade and Employment: Government of India, Department of Commerce, Comments on U.S. Proposals for Expansion of World Trade and Employment, 6, U.N. Doc. E/PC/T/5–E/PC/T/W.14 (Oct. 21, 1946). 127 Id. at 14–15. 128 Id. at 15. 129 Twenty-Second Meeting of the Second Session, supra note 124, at 44. 130 Id. page 33
measures, but the right was given to them and not to under-developed countries, as Mr. Wilcox said yesterday”131 Also:
“The Cuban delegate touched upon THE question of the conference [...] I think the only solution we could adopt here would be to extent the provisions of the London compromise to industrial products, making, of course, all necessary adjustments to restore the equilibrium which might be destroyed by this article.”132 In attempting to make a case for a possible revision of the provisions for quantitative restrictions for protective purposes in the Draft Charter, the Indian representative saw little wiggle room for developing countries and stated of Wilcox’s speech
"I feel I am in the position not of an advocate defending an accused person, nor even of one appearing on behalf of a prisoner already tried and sentenced, but unhappily - and I say this after listening to the speech made by Mr. Wilcox - of one pleading for a reprieve for a condemned man upon whom sentence of death is about to be carried out.133 The issue of ‘freedom’ for under-developed countries to impose measures aiming their national economic development was not a matter of state involvement in the economy or a question of elimination of all trade barriers. Rather, the issue was deciding which of the four instruments regulated by the Draft ITO Charter would be legitimate measures to regulate the economy and which ones would not. There were four main regulatory possibilities: tariffs, subsidies, state trading, and quantitative restrictions, While the US preferred the use of price-based instruments, such as tariffs, India preferred volume-based instruments, such as quantitative restrictions. The Indian delegation noted that this unbalance:
“on tariffs, no ceilings were fixed other the obligations voluntarily taken by parties. On subsidies, only where serious prejudice exists, there needs to be a discussion between the parties concerned. There are no bounds to state trading. But when it comes to quantitative restrictions, Article 25 bans it altogether, and no exception covers it.”134 The option for this method of regulation, India argued, “is in favour of rich countries which can resort to subsidies and which can increase the amount of their subsidy to match every effort on the part of the foreign supplier to lower the price of his product.”135 In light of this arbitrary
131 U.N. Conference on Trade and Employment, Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment: Verbatim Report, Twenty-Third Meeting of Commission A, 4, U.N. Doc. E/PC/T/A/PV/23 (July 2, 1947) [hereinafter Twenty-Third Meeting of the Second Session]. 132 Twenty-Third Meeting of the Second Session, supra note 131, at 9–10. 133 Twenty-Second Meeting of the Second Session, supra note 124, at 24. 134 Id. at 26–28. 135 Id. at 32. page 34 choice for regulatory instruments, India argued that quantitative restrictions posed no more risk of abuse than other regulatory choices and that
“[India was] convinced that if we are to carry out our programme of economic development, we must have a residuum of power to impose quantitative restrictions, under internationally accepted criteria and in certain conditions.”136 Similarly, Lebanon argued:
“The under-developed countries are not asking to have complete freedom to use quantitative restrictions whenever they like. The issue before us is whether they should be allowed to use this means for industrial development, subject to subsequent control by the Organization. The Lebanese Delegation believes that they should be given this limited freedom of action, rather than be subjected to the prior approval of the Organization.”137 (emphasis added) Gradually, quantitative restrictions were upheld as a deviation from acceptable forms of import controls and stricter controls and diminished residuum of power was granted to parties under this instrument. This choice shaped rules on what type of state intervention should be permitted as a general ‘rule’ and which type of intervention would be deemed to be an ‘exception’ in the emerging system. At the time, India and other countries objected to this definition of the preferred instrument of trade regulation as an exceptional measure, while protective instruments that were of marginal interest to them (tariffs and subsidies) were to be regarded as normal ways of regulating trade, subject only to negotiated reductions or consultation requirements.
The two visions of the role of the state in international trade put forward in this discussion, therefore, resulted in contradictory views on the comparative merits of price-based and volume-based instruments in the control of international trade. One position was not necessarily more protectionist than the other. The question at issue was “not whether protection is to be provided, but only how it may be provided”.138
In fact, in its Proposals, the US had clearly stated that no government was ready to embrace full trade in any absolute sense.139 What it wanted to argue was that the special treatment developing countries were asking for “more legal freedom” would not give them any extra “help” or “assistance”.140 The different policy preferences of developed and then “under-
136 Id. 137 Twenty-Sixth Meeting of the Second Session of the Prepartory Committte, supra note 123, at 8. 138 See Twenty-Second Meeting of the Second Session, supra note 124, at 15 (U.S. statement). 139 See id. 140 HUDEC, supra note 111, at 25. page 35 developed” countries came to be reflected in the GATT as “rules” and “exceptions” respectively, laying the roots for the conceptualization of “developing” countries' concerns as “exceptional” or “special” within the trading system.141
Overall, the Charter attempted not to take a position as to the internal organization of member’s economies, containing countries with mixed and non-mixed market economies as well as socialists from the East.142 It was originally designed so that rules
would apply with equal fairness and equal force to the external trade of all nations regardless of whether their internal economies were organized upon the basis of individualism, collectivism, or some combination of the two.143
It was precisely the Charter’s departure from the classic liberal perspective of market arrangement that ultimately led to its failure. In the years between 1947 and 1950, the business community in the US turned itself against the Charter.144 After seeking Congressional ratification for over two years, the Administration gave up late in 1950 and withdrew the Charter from further consideration.145
Meanwhile, the ITO Preparatory Committee adopted a resolution at the end of the first session, stating “the Governments attending the first session had received and accepted an offer from the United States Government to negotiate concrete arrangements for the relaxation of tariffs and trade barriers of all kinds.” 146 It was an initiative of a core group of 23 countries seeking to give early impetus to the process of reducing customs duties.147 Thus, the GATT was negotiated in parallel as a “Protocol of Provisional Application.” The failure of the ITO left the GATT as the only set of treaty rules and principles governing the post-war international trading system. The GATT consisted of the trade-policy provisions of the draft ITO Charter (Chapter IV of the Charter) with some additional provisions, setting the framework for the elimination of quantitative restrictions as advocated by the developed countries in the above-mentioned discussions.
141 See also KENNETH W. DAM, THE GATT: LAW AND INTERNATIONAL ECONOMIC ORGANIZATION 12–14 (1970). Views on the role and organization of international trade differed profoundly between deficit and surplus countries, developed and underdeveloped countries, market-economy and planned-economy countries, and so forth. 142 LANG, supra note 2, at 25–26. 143 JACKSON, supra note 122, at 637. 144 WILLIAM DIEBOLD JR., THE END OF THE ITO (Princeton Essays Int’l Fin. No. 16, 1952). 145 Id. 146 First Session, supra note 121, at 48–49. 147 JACKSON, supra note 122, at 35–58. page 36
When it came to the “economic development” exceptions, however, the GATT governments were unwilling to incorporate all the concessions that had been made in the draft ITO Charter. The GATT incorporated the ITO Charter's infant-industry exceptions for tariffs and quantitative import restrictions (ITO Article 13), but, despite vigorous protests, the United States refused to agree to include the ITO provision permitting new preferences (ITO Article 15).148
Even though the GATT was constituted as a “liberal club,”149 it was nevertheless a different type of liberalism than the pure laissez-faire of the nineteenth century. The “embedded liberalism”150 bargain carried a mark of the economic instabilities of the inter-war years and combined a belief in the responsibility of governments to mitigate the social costs associated with free markets. The responsibility of governments to establish full employment and welfare policies and institutions were protected under the UK, and US’ transatlantic bargain and the substantial room was left for the parties to intervene in their economies.
b. 1950s and 1960s: Policy Space as Non-Reciprocity
The normative consensus for the GATT rested on a bargain about acceptable forms of governmental intervention in economic life.151 The Anglo-American consensus (and divide) inaugurated a debate on the extent to which states had deference and policy space within the trading regime. This underlying tension or ‘tug of war’ between the two visions of the trade regime represented the main ideological divide within the workings of the GATT until the late 1950s. This logic changed from the late 1950s to the end of the 1970s.
While at the time of ratification of the GATT less than half of the original contracting parties of the GATT were developing countries (10 out of a total of 23 parties), this numerical balance changed over the next two decades.152 Between 1947 and 1973, the membership of the GATT
148 HUDEC, supra note 111, at 24. 149 Robert Keohane & Joseph S. Nye Jr., The Club Model of Multilateral Cooperation and Problems of Democratic Legitimacy, in POWER AND GOVERNANCE IN A PARTIALLY GLOBALIZED WORLD 219, 219–25. 150 Ruggie, supra note 110, at 65. 151 LANG, supra note 2, at 195. 152 The original developing counrties were Brazil, Burma, China, Ceylon, Chile, Cuba, India, Pakistan, Syria and Lebanon. Within the first few years China (by then Taiwan), Lebanon, and Syria withdrew. Four more developing countries acceded in the Annecy negotiations in 1949: the Dominican Republic, Haiti, Nicaragua and Uruguay. Indonesia became a contracting party in 1950, on achieving independence. Peru and Turkey negotiated their entry during the Torquay Round negotiations of 1951. By the end of the Torquay Round page 37 grew to 85 members, most of which were newly independent developing countries.153 This period was marked by the legalization of the principle of self-determination of nations in international law. The principle of self-determination, namely, the right to freely choose their sovereignty and international political status with no external compulsion or interference, had its origins with the Atlantic Charter, signed on 14 August 1941, by Franklin D. Roosevelt, President of the United States of America, and Winston Churchill, Prime Minister of the United Kingdom.154
In 1954, a Review Session provided an occasion for developing countries to renegotiate the GATT-ITO compromises on legal policy towards developing countries. Though no effort to reintroduce the highly controversial ITO provision authorizing new tariff preferences were made, there were new demands for greater “legal freedom” to create new protective trade barriers for infant-industry protection.155 Developing countries sought less pressure in negotiations for reciprocal tariff concessions and infant-industry exceptions in Article XVIII were re-drafted. They now stated that economic development furthers the objectives of the General Agreement, making clear that the trade barriers authorized by Article XVIII were not derogations from GATT policy but, instead, were entirely legitimate measures in complete harmony with GATT policy. The Review Session relaxed the requirements that developing countries had to satisfy to use quantitative restrictions to limit imports in times of serious balance-of-payments disequilibrium under Article XVIII(B).156 These developments pushed the GATT to become, in Dam’s words, an “international body affirmatively, and, at times aggressively, attempting to promote the exports of less developing countries.”157
Departing from the ideological confines of the bargain struck between the architects of the post-war system,158 this new way of thinking was a direct result of the change in the
negotiations, the total developing country membership stood at fourteen. The developed country membership had risen to twenty and included all the major developed countries except Japan, which joined in 1955, and Switzerland, which joined in 1966. See HUDEC, supra note 111, at 30–32. 153 LANG, supra note 2, at 45. 154 See U.N. Charter. 155 HUDEC, supra note 111, at 33–34. 156 Id. 157 DAM, supra note 141, at 225. 158 Wilkinson notes that the early GATT negotiations were dominated by the three most economically and politically significant contracting parties—the US, UK, and France—with Canada, Belgium and Luxembourg playing important roles. Not only did the US, UK, and France set the agendas to advance their national interests but they also dominated all aspects of GATT machinery. See HUDEC, supra note 111, at 54–55; RORDEN WILKINSON, THE WTO: CRISIS AND THE GOVERNANCE OF GLOBAL TRADE 55 (2006). page 38 membership and a dramatic increase in the number of developing countries. These countries brought to the system the understanding that the international economic order was established to exploit and impede the development of non-industrialized nations at the time.159 This idea saw a bias towards industrialized countries, dividing the world into central and peripheral economies, and shifting the gains of the system from the South to the North.160 The logic was that, despite the suggestions of the classical theory of trade that free traders would obtain the best results from international specialization, the practice produced a different outcome. The international division of labour promoted exchanges of primary products with fluctuating prices (inelastic demand) for industrial products with stable and rising prices (elastic demand). This international division of labour brought unfair trade and a transfer of resources from the periphery to the centre.161
The fluctuation of prices added to the transfer of resources resulting from the existing international economic order prevented capital formation in the peripheral countries, making them go further into debt to compensate for the lack of savings and to maintain an acceptable rate of economic growth. Rivero explains that the productive manufacturing structure in these countries “became increasingly responsive to the needs of a small domestic market composed of the upper and middle-class sectors of the urban population and it produced goods that were not necessarily designed to satisfy the needs of the majority of the population.”162 Further aggravating, the small domestic industrial production was dependent on imports of goods and foreign industrial technology acquired with the inadequate earnings obtained from the export prices of basic products.
According to Rivero, this logic demonstrated that underdevelopment of the Third World could only be explained in reference to the internationalization of the economy and the establishment of a world market. Underdevelopment was not an “isolated stage in a country’s economic history that is similar to the stages the industrialized countries had to go through,” rather, it was “the result of a historical process of economic conditioning imposed on
159 LANG, supra note 2, at 42. 160 MOHAMMED BEDJAOUI, TOWARDS A NEW INTERNATIONAL ECONOMIC ORDER (1979); Raúl Prebisch (U.N. Secretary-General of the U.N. Conference on Trade and Development), Towards a New Trade Policy for Development: Report of the United Nations Conference on Trade and Development, U.N. Doc. E/CONF.46/3 (1964); Robert W. Cox, Ideologies and the New International Economic Order: Reflections on Some Recent Literature, 33 INT’L ORG. 257 (1979). 161 OSWALDO DE RIVERO B., NEW ECONOMIC ORDER AND INTERNATIONAL DEVELOPMENT LAW 2–3 (Pergamon 2014) (1980). 162 Id. page 39 underdeveloped economies by the countries which are now developed.”163 This structure of unequal development, both at the national and at the international levels, led to what economists called a “model of dependent economic development” or a “model of peripheral capitalism.”164
This view of development/underdevelopment was accepted by the United Nations in the adoption by the General Assembly of the Declaration on the Establishment of a New International Economic Order:165
The developing countries, which constitute 70 percent of the world's population, account for only 30 percent of the world’s income. It has proved impossible to achieve an even and balanced development of the international community under the existing international economic order. The gap between the developed and the developing countries continues to widen in a system which was established at a time when most of the developing countries did not even exist as independent States and which perpetuates inequality.
The turning point for the GATT came in 1958 with the publication of the Haberler Report,166 a GATT report commissioned by the member parties and chaired by Gottfried Haberler. Its purpose was to inquire particularly into the failure of less developed countries to develop as rapidly as industrialized countries. The Report concluded:
there are special considerations affecting the position of under-developed primary producing countries which justify a greater use of trade controls by them than by the highly industrialized countries [...] Finally, insofar as import restriction can turn the international terms of trade in favour of the restricting country, it can be argued that poorer countries should have a somewhat greater freedom in their use than rich countries.167
The Haberler Report was the first examination of issues facing developing countries during the GATT years. Its adoption led to the establishment of the current Committee on Trade and Development (CTD) as well as the International Trade Centre. By 1963, the Committee on
163 Id. at 4. 164 This has been discussed by numerous authors, including Raul Prebisch, Paul Baran, H. Jaguaribe, Celso Furtado, G. Horowitz, Touraine, Samir Amin, Fernando H. Cardoso, Gunder Grank, Sweezy, Oswaldo Sunkel. See also GREGORY F. TREVERTON, LATIN AMERICA IN WORLD POLITICS: THE NEXT DECADE, (1977). 165 G.A. Res. 3201 (S-VI), Declaration on the Establishment of a New International Economic Order, (May 1, 1974). 166 Contracting Parties to the Gen. Agreement on Tariffs & Trade, Trends in International Trade: A Report by a Panel of Experts, Sales No. GATT/1958-3 (Oct. 1958) [hereinafter Haberler Report]. The report’s popular name draws upon the name of its chairman, Gottfried Haberler. The other Panel members were Roberto da Oliveira Campos, James Meade, and Jan Tinbergen. 167 Id. page 40
Trade and Development, (Committee III, at the time) had drawn up an eight-point Plan of Action, calling for
standstill provision as regards the erection of new tariff and non-tariff barriers; elimination of quantitative restrictions; duty-free entry for tropical products; elimination of tariffs on primary products; the reduction and elimination of tariff barriers to exports of semi-processed and processed products; progressive reduction of internal fiscal charges and revenue duties; and, finally, a provision for reporting on measures taken by contracting parties with respect to these barriers to trade […] and the adoption of other appropriate measures which would facilitate the efforts of the developing countries to diversify their economies, strengthen their export capacity and increase their export earnings.168
The Committee on Trade and Development (Committee III) represented the institutionalization of developing country concerns within the GATT. According to some contracting parties, it was “largely responsible for breaking through the wall of indifference which had blocked the desires, of the developing countries, and for having pulled the GATT out of the narrow confines of its original conception.”169 Nevertheless, its eight-point Plan of Action became part of the Kennedy Round (1964-1967) and, to a large extent, it was never implemented.170 A 1965 report found that though some progress had been made with regards to standstill tariff provisions and the removal of quantitative restrictions, hard-core tariff, internal taxes and quantitative restrictions affecting some products of considerable and immediate importance to some less- developed countries remained in place.171
A similar developing country reaction was seen at the preparatory meetings for the first meeting of the United Nations Conference for Trade and Development (UNCTAD) in 1964, creating a “unanimous agreement in favour of the early establishment of a mutually acceptable system of generalized, non-reciprocal and non-discriminatory preferences which would be beneficial to developing countries”. At the Second Special Session of the contracting parties, to present the Protocol Introducing Part IV on Trade and Development, the Chairman stated:
This new Part showed clearly that the promotion of the trade of less-developed countries and the provision of increased access for their products in world markets, were among the primary objectives of the contracting parties. These objectives were now set forth in a new Article
168 See Committee III - Expansion Trade, Draft Report of Committee III of the Meetings of March-April 1963, 3–6, GATT Doc. Spec(63)44 (Apr. 3, 1963). INT(65) l8, 22 January 1965 . See https://docs.wto.org/gattdocs/q/GG/SPEC/63-44.pdf. 169 See Contracting Parties, Second Special Session, Summary Record of the Second Meeting, 13, GATT Doc. 2SS/SR.2 (Nov. 25, 1964) [hereinafter Summary Record of the Second Meeting]. 170 Alexander Keck & Patrick Low, Special and Differential Treatment in the WTO: Why, When and How?, ECON. DEV. 147, (2006). 171 See INT(65), supra note 168, at 4. page 41
XXXVI. Article XXXVII laid down the commitments in the field of commercial policy which contracting parties would accept in order to promote these objectives. Article XXXVIII provided for joint action by the contracting parties, both within the framework of the GATT and in collaboration with other intergovernmental bodies, to further the objectives.172
Developing countries tried to push the limits on new kinds of “legal freedom” under Part IV of the GATT. Efforts were made to include an authorization for preferences and to settle the reciprocity question by making it clear that no reciprocity of any kind should be requested. Developing countries also asked for a second reform of GATT adjudication procedures to adopt new sanctions for legal violations, including both money compensation and retaliation by the Contracting Parties as a whole.
Further, they asked that the GATT Secretariat assume a prosecutorial role in GATT lawsuits to relieve small countries of the political onus that befalls on a plaintiff. The developed countries refused to include any of these proposals in Part IV. Part IV did not mention preferences, and the text on reciprocity was merely a repetition of the vague Kennedy Round negotiating rule. As a compromise, the proposals were referred to the GATT's soon-to-be- created Trade and Development Committee.173 Part IV became “merely a slightly more impressive statement of the urgent but non-binding texts.”174 Its language was more legalistic giving the illusion of greater commitment (indeed, the title of the new Article XXXVII was “Commitments”) but it contained no definable legal obligations and was never seriously enforced.175
The Cuban delegate expressed the view that “it was fairly obvious that in the draft Chapter, there were no truly satisfactory and binding commitments.” For him, the Chapter was an attempt to harmonize incompatible interests,” and he feared it “might be used as a smoke- screen for confusing world opinion.”176 Similarly, the delegate of Indonesia argued that there remained a need for more positive action on behalf of the developed countries and that the less developed countries should be given “more flexibility in the application of the GATT rules” in the light of their development and trade needs.177 To these claims, the delegate of the United
172 See Contracting Parties, Second Special Session, Summary Record of the Fifth Meeting, GATT Doc. 2SS/SR.5 (Feb. 19, 1964) [hereinafter Summary Record of the Fifth Meeting]. 173 HUDEC, supra note 111 at 55. 174 Id. 175 See LANG, supra note 2, at 46 (arguing that the language in Part IV was written with little precision and with few binding commitments). 176 See Summary Record of the Second Meeting, supra note 169, at 12. 177 See id. page 42
States stated that the interest of least-developed countries had been “ably represented” in the work of the Committee and that less-developed countries should “take advantage of the willingness of developed countries to make these very substantial commitments.”178
Despite the lack of bite, Parties saw the incorporation of the new Part IV of the agreement as “not itself an end, but a beginning” towards the purpose of adapting the GATT obligations to the needs of developing countries.179 India saw it as “an initial, big and revolutionary step.” Yugoslavia described “the beginning of a new process in the economic cooperation between industrialized and developing countries,” and the Netherlands saw the beginning of a new era for developing countries in the GATT.180 Article XXXVI:8 stated:
The developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less-developed contracting parties.
There was the general recognition that developing countries were no longer expected to offer reciprocity in their multilateral concessions. It was a moment of great importance to the development of the regime and, for the development of the concept of policy space. The idea that developing countries were no longer expected to offer reciprocity in their multilateral concessions recognized that the needs of developing countries were different from those of developed countries. This moment also confirmed that countries in different developmental stages should be able to strike different bargains with different balances. Nevertheless, the nature of the bargains remained the same across the board: the path to industrialization, no matter in which terms, was to be thread through increased shares in world trade and market liberalization.
c. The 1970s and 1980s: Institutional Experimentation as Policy Space
The developing country push towards structural changes in the international trading order saw advances under the United Nations framework throughout the 1970s. In 1968, the UN Conference of Human Rights adopted the Teheran Proclamation, affirming that there was a positive link between economic and social rights and the enjoyment of political and social rights. The Proclamation identified a clear link between the implementation of human rights
178 See id. at 9. 179 See Summary Record of the Fifth Meeting, supra note 172. 180 See id. page 43 obligations and effective national and international policies of economic and social development. This relationship was institutionalized in the “right to development.”181 It was predicated on the idea that development and economic rights are at the heart of the human rights project and, that international economic structures play a vital role in the achievement of human rights.182
During the same period, the efforts by the Group of 77 developing countries led to the inauguration of the New International Economic Order.183 The NIEO consisted of a set of proposals put forward by developing countries through the United Nations Conference on Trade and Development (UNCTAD) to promote their interests by improving their terms of trade, increasing development assistance, developed-country tariff reductions, and other means. The NIEO attempted to adapt the Bretton Woods system in favour of Third World countries, focusing on restructuring of the world's economy to permit greater participation by and benefits to developing countries.
In the GATT, developing countries had both victories and defeats in trying to push the structural changes for development initiated with Part IV of the GATT. The decade of the Tokyo Rounds was marked by the US suspension of the convertibility of the dollar into gold and the breakdown of the fixed system of exchange rates, as well as the explosion of the 1973 oil crisis. Developed countries faced the most significant recession since the post-war years. The need for international trade reform was great, and the Tokyo Round reforms were of a
181 Kéba M’baye, Le droit au Développement Comme un Droit de L’homme, 5 REVUE DES DROITS DE L’HOMME 505–34 (1972); see also U.N. ESCOR 33rd Sess., 1389 mtg. E/CN.4/SR.1389 (Feb. 15, 1977), https://digitallibrary.un.org/record/742641; U.N. ESCOR 33rd Sess., 1392 mtg. E/CN.4/SR.1392 (Feb. 16, 1977), https://digitallibrary.un.org/record/742685; U.N. ESCOR 33rd Sess., 1393 mtg. E/CN.4/SR.1393 (Feb. 17, 1977), https://digitallibrary.un.org/record/742694; U.N. ESCOR 33rd Sess., 1394 mtg. E/CN.4/SR.1394 (Feb. 17, 1977), https://digitallibrary.un.org/record/742695; U.N. ESCOR 33rd Sess., 1395 mtg. E/CN.4/SR.1395 (Feb. 18, 1977), https://digitallibrary.un.org/record/742696; U.N. ESCOR 33rd Sess., 1396 mtg. E/CN.4/SR.1396 (Feb. 18, 1977), https://digitallibrary.un.org/record/742697; U.N. ESCOR 33rd Sess., 1397 mtg. E/CN.4/SR.1397 (Feb. 21, 1977), https://digitallibrary.un.org/record/742698; U.N. ESCOR 33rd Sess., 1398 mtg. E/CN.4/SR.1398 (Feb. 21, 1977), https://digitallibrary.un.org/record/742699; Comm’n on Human Rights, Rep. of the Thirty-Third Session, U.N. Doc. E/CN.4/1257 (1977), https://documents-dds- ny.un.org/doc/UNDOC/GEN/NG9/002/59/PDF/NG900259.pdf?OpenElement. 182 Jack Donnelly, In Search of the Unicorn: The Jurisprudence and Politics of the Right to Development, 15 CAL. W. INT’L L. J. 473 (1985). Donnelly surveys the literature on the matter to conclude that the more prominent international legal sources cited as a basis for such right are: Articles 55 and 56 of the UN Charter; the Universal Declaration of Human Rights, especially Article 22 (the right to social security and to the realization “of the economic, social and cultural rights indispensable to [human] dignity and the free development of [the human] person”) and Article 26(2) (“Education shall be directed to the full development of the human personality. . .”); Article 1 of both International Covenants on Human Rights (the right to self- determination); and the International Covenant on Economic, Social and Cultural Rights, especially Article 2(1) (the obligation to implement progressively the enumerated rights) and Article 11 (“the right of everyone to an adequate standard of living”). Id. at 479. 183 See G.A. Res. 3201 (S-VI), supra note 165; G.A. Res 3281 (XXIX), supra note 98. page 44 constitutional scale. The new agreements negotiated during the Tokyo Rounds penetrated the legal fabric of protectionism addressing a wide array of trade restrictions.184 Nonetheless, the negotiations largely failed to reshape the logic and structure of the trading system towards developing countries interests, consolidating a more defensive implementation of non- reciprocity rather than guaranteeing further positive rights under the agreement.185
Nonetheless, in 1971, the GATT adopted two waivers permitting two types of preference schemes.186 One was a ten-year waiver setting aside the MFN obligation in Article I to permit the institution of the Generalized System of Preferences (GSP). The GSP removed import duties from products coming into developed markets from vulnerable developing countries. It was brought under legal effect within the GATT framework as a ten-year temporary waiver under Article XXV:5, adopted on May 25, 1971. The Decision on a Generalized System of Preferences of June 25, 1971, temporarily waived the provisions of Article I for ten years with respect to the GSP preferences. In 1971, the six original members of the EEC implemented the first GSP program on a non-reciprocal, nondiscriminatory basis. The benefits were available to the so-called Group of 77 developing countries, provided that the beneficiaries would self-identify themselves. Throughout the decade, twenty OECD countries had notified GATT of GSP programs they had established and were monitored by UNCTADs Special Committee on Preferences.187
The other waiver adopted was called the Global System of Trade Preferences (GSTP), under which a number of developing countries were allowed to exchange tariff preferences among themselves. In effect, the two waivers represented the incorporation of Article 15 of the ITO Charter, 23 years after the signing of the GATT. Later called the “Enabling Clause,”188 the two waivers of Article I in 1971 marked the end of a period of upheaval that began with the 1957 Minister’s Resolution, which called forth the Haberler Report. By 1971, the GATT's
184 GILBERT R. WINHAM, INTERNATIONAL TRADE AND THE TOKYO ROUND NEGOTIATION 9 (1986). 185 LANG, supra note 2, at 47. 186 The idea of a Generalized System of Preferences had been previously introduced by UNCTAD at its first conference in 1964. Formally adopted at UNCTAD's second conference in 1968, it was conceived with three original features: 1) developed countries would grant temporary and unilateral tariff preference to developing countries; 2) tariff preferences would be on goods of export interest to developing countries in which they were not competitive internationally; 3) tariff preferences would not be extended to goods produced by an industry in the importing country if that industry was vulnerable to import competition. Under the GSP, major developed countries gave tariff preferences to the imported products of developing countries. See also Generalized System of Preferences, June 25, 1971 GATT B.I.S.D (18th Supp.), at 24–26 (1972). 187 THE WORLD TRADE ORGANIZATION: LEGAL, ECONOMIC AND POLITICAL ANALYSIS (Arthur Appleton & Michael G. Plummer eds., 2007). 188 See Decision on Differential and More Favourable Treatment, Reciprocity, and Fuller Participation of Developing Countries, Nov. 28, 1979, B.I.S.D. (26th Supp.), at 203 (1980). page 45 new relationship with developing countries had been redefined.189 Though the contours of this new relationship did not change, developing countries were granted a permanent legal basis for the waiver approach under the GATT system. Former GATT director, Olivier Long, describes the Tokyo Rounds as the political resolve of the then three Great Powers of world trade - the United States, the European Community and Japan:
“to secure additional benefits for the international trade of the developing countries, so as to achieve a substantial increase in their foreign exchange earnings, diversification of their exports and acceleration of the rate of growth of their trade, taking into account their development needs.”190
Olivier’s causal relation shows that though there was an explicit recognition that there existed a set of needs different for developing countries and developed, nevertheless, it assumed that an increase in foreign exchange earnings, diversification of exports and expansion of trade was the way forward to both of these groups of countries. Developing countries, he proceeds to state, have “special problems that require the sympathy and help of the world trading community.”191
Long’s speech framed the needs of developing countries as a ‘problem’ as opposed to the rule in a system formed of a majority of developing countries. Despite forming a majority, developing countries were at the receiving end of ‘sympathy’ and ‘help’ from developed countries. They would have to follow policies that, first, promoted international trade and, second, considered their development needs. As such, development needs were still circumscribed to preferential treatment, as opposed to being incorporated as structural reforms in the rules of the game.
The Uruguay Round deepened this tendency and the liberalizing logic of the Tokyo Rounds. In 1995, the launch of the WTO gave profound reach to multilateral trade politics, from patents (through the agreement on Trade-Related Aspects of Intellectual Property Rights or TRIPS), the regulation of foreign investment (through the agreement on Trade-Related Investment Measures or TRIMs), to trade in services (through the General Agreement on Trade in Services or GATS). The Uruguay Round Agreements blocked access to technology by blocking off the practice of compulsory licensing in negotiations with multinational
189 HUDEC, supra note 111, at 60. 190 Oliver Long, Olivier Long, GATT Director-General, Address to Polytechnic Association: The 1973 Multilateral Trade Negotiations: The Crucial Choices Ahead (May 3, 1973), in GATT Press Release GATT/1122 (May 3, 1973), https://docs.wto.org/gattdocs/q/GG/GATT/1122.PDF. 191 Id. at 3. page 46 companies under the TRIMs Agreement. Similarly, it ruled out performance requirements local content, trade balancing, export clauses, joint ventures, R&D, training in such negotiations.192 Developing countries agreed on liberalizing “new areas” such as intellectual property and services, with opportunities for expanding international sales for developed countries while getting a limited amount of market access in agriculture, textiles, and clothing.
This Section has provided an outlook of the key moments in which the economic basis of the trading system was challenged. It illustrated how, despite important changes in the relationship between developed and developing countries, these moments did not alter the nature and types of regulatory measures accepted by the system. Rather, the developing countries victories represented negotiated adjustments to the system. The right to non- reciprocity, waivers to MFN obligations and the inclusion of Part IV of the GATT provided breathing room to developing countries but did not question the basis and the logic of the system.
As such, the moments of supplementary tweaks to the system by far outweighed those of systemic change.193 This distinction is essential insofar as it reveals how different regulatory options and attempts for systemic change were gradually dissipated and substituted for supplemental compromises on the architecture of the system. By understanding such distinction, this Section attempted to provide a clearer picture of how the relationship between trade liberalization and development have meant different contextual options for regulatory measures. Moreover, they have portrayed an understanding of development as a derogation from rules as opposed to development as a possibility for experimentation through an institutional neutral legal framework.
3. Depoliticization of Trade Law and the Role of Experts
Since the establishment of the post-war international economic institutions, the development of the international system has defined the contours and the role of actors under international law. Experts and expertise have played a key role in maintaining the post-war international
192 Wade, supra note 100. 193 Nicolas Lamp, How Some Countries Became “Special”: Developing Countries and the Construction of Difference in Multilateral Trade Lawmaking, 18 J. INT’L ECON. L. 743 (2015); Nicolas Lamp, The “Development” Discourse in Multilateral Trade Lawmaking, 16 WORLD TRADE REV. 475 (2017); Andrew Lang, The Double Movement of Law and Expertise, in EXPERT KNOWLEDGE IN GLOBAL TRADE 124 (Erin Hannah et al., 2015). page 47 system. From international organizations to academia and transnational business, expertise has adopted a series of practices, discourses, and languages that have become a structural part of the system.194 These professional networks and conventions have operated as a transnational foundation to the regime, keeping it together despite conflicts between nations as well as diverging economic and ideological preferences. It is fundamental, therefore, to analyze how the background work of experts operates in the international system and influences considerations regarding legitimate regulatory autonomy of countries.
Much like modern international law, built upon the prevailing ideas of cooperation and mutual assistance, international economic law embodies some of the economic preferences and ideologies that were prevalent in the context of its creation. The post-war economic system was built upon the shared belief that strong economic ties among nations were crucial to the establishment of peace among nations. 195 The solidity of country relationships was measured by the levels of liberalized transit of goods, services, and capital between them. The stronger and more liberalized these relationships were, it was (and is) believed, the more prosperous countries would become. International economic practitioners internalized this paradigm as the foundation of the discipline and built its key concepts around these ideas.
This Section first presents a brief background on some key aspects of legal realism and critical legal thought to understand how laws are constitutive of political and economic relationships between countries. Specifically, it highlights how systemic political and ideological decisions are made by experts daily; supporting and maintaining distributional choices for economies and actors across the globe.
a. Legal definition of economic concepts
The classic legal realist critiques of legal doctrine, judicial behavior, and the role of law attempt to explain how law constructs social, economic, and political inequities. The legal realist movement first came to the fore over a century ago in the Progressive Era (loosely 1880-1930). The United States was facing a period of upheaval and crisis. Industrialization created a whole new economic and social order, producing new forms of social, economic,
194 Rorden Wilkinson, Talking Trade: Common Sense Knowledge in Multilateral Trade Regime, in EXPERT KNOWLEDGE IN GLOBAL TRADE 21, 22 (Erin Hannah et al., 2015). 195 CORDELL HULL, THE MEMOIRS OF CORDELL HULL, MACMILLAN COMPANY (1948); William R. Allen, The International Trade Philosophy of Cordell Hull, 1907-1933, 43 AM. ECON. REV. 101 (1953). page 48 and ecological disruption, dislocation, precarity, and crisis. In this context, legal realists wished to build publicly-oriented policies, new systems of governing and recover the focus on the public interest writ large. Attempts to rethink the economy and its institutions turned to the role of law in creating and sustaining a model that no longer seemed adequate. As such, legal realists provided useful insights into how legal definitions recreate power imbalances, shape identities, and assign value and property to within society.
The idea that law influences economic rationalities is not a new one. Institutional economists and legal realists first studied the constitutive role of law in the economy in the early twentieth century. 196 John Common’s work “The Legal Foundations of Capitalism and Institutional Economics” was among the first to provide a systemic explanation for the evolution of capitalism through the interaction between polity and the economy. “The Legal Foundations of Capitalism” offers an extensive account of how a legal system shapes and creates capitalism. According to Commons, capitalism develops and evolves through the state protection of some economic interactions as opposed to others.197
Commons narrates the evolution of the legal concept of property in Anglo-Saxon law and explores the changing concepts of property and liberty through the legal definitions of use- value to exchange-value. The evolution of these legal constructs was seen as critical to the formation of capitalism. Commons attributes the social construction of capitalism to the legal transformation of the concept property by the courts. The recognition of an ‘exchange-value’ of property and incorporeal assets permanently changed market society. According to the author, as incorporeal property became legally protected, a ‘credit economy’198 was formed. This meant that the economy became profoundly guided by the expected behavior of citizens, judges and legislatures. This incorporeal aspect of the economy gave rise to two parallel but opposing markets: transactions of money and credit (promises or expectations of future purchasing power).199 These two markets created opposite classes of legal claims to commodities and services as well as two opposing concepts of value.200
196 Andrew Lang, The Legal Construction of Economic Rationalities?, 40 J.L. & SOC’Y 155 (2013). 197 JOHN R. COMMONS, LEGAL FOUNDATIONS OF CAPITALISM (Transaction Publishers 1995) (1924). 198 Id. at 245. 199 Id. at 238. 200 Id. at 254. page 49
In “Legal Foundations of Capitalism,” Commons explains that institutions operate through the collective restraint and liberation of collective action.201 The relationship between ‘wills in action’202 creates the foundation for ‘going concerns’ and their rules.203 That is to say; Commons understands economic reform as the task of adapting the powers of the going concerns, institutional organization, and their working rules. This insight is directly relevant to the evolution of trade law since the establishment of the post-war regime and the GATT. From the initial framework of an International Trade Organization to the more contractual and diplomatic mechanisms established by the GATT, the system gradually changed according to demands in its polity, hegemons, and members. Over more than 70 years, the ‘going concerns’ varied from rebuilding nations in the post-war to full employment, open markets, to cutting regulations beyond borders, to non-trade concerns and, arguably, through a more equitable distribution of the gains of trade.
Commons work contributes to the understanding that economics is not isolated from politics or law. He contradicts the conventional ideas of interventionism and laissez-faire by defending that it is impossible to comprehend the economy in apolitical terms. He argues that it is incorrect to speak of government intervention and non-intervention. For him, governance involves the exercise of volition in permitting and encouraging certain classes of activity while prohibiting others. In this perspective, laissez-faire capitalism has more to do with a particular categorization of activities into those that are permitted by the State, rather than total deregulation as an ultimate governance goal.
Much like Commons, Morris Cohen describes the power of law in determining economic and power relationships within society. For him, property laws are a form of sovereign power. 204 Cohen’s work is a constant alert to the fact that modern captains of industry and finance are, in many ways, sovereigns of other members of society. These “captains” are capable of directing currents of production and the preferences and choices of consumers. Delegating power through property also amounts to delegating sovereignty and decision-making power on public matters. Consequently, the manners in which rights need to are regulated need to take into account power relationships embedded in this form of property.205
201 Id. at 73. 202 Id. at 303. 203 Id. at 145. 204 Morris R. Cohen, Property and Sovereignty, 13 CORNELL L. REV. 8, 29 (1927). 205 Id. page 50
In trade, Cohen’s notion sheds light on the fundamental institutional constraints that the post- war system imposed on countries’ production systems, arguably freezing them in industrial or in periphery economies. An early discussion in the negotiations for the Havana Charter indicates the importance of creating an institutional environment that would allow flexibility for countries to determine their production and become “captains” of industry and finance. The economic production of industrialized and agricultural goods is one of the ways in which value and power relations were allocated among countries in the international trading system. Developed countries’ reluctance to allow for instruments that would alter the global production patterns can be seen in the negotiating history of the ITO Charter. On behalf of the US, Clair Wilcox stated that some developmental instruments were not to be used by developing countries. Further institutional concessions to allow “the so-called underdeveloped countries to use instruments other than subsidies and tariffs would be an act of extreme generosity”, claimed Wilcox. “These countries should not be able to implement quantitative restrictions. Allowing them to do so would lead to “a complete surrender of fundamental principles for peaceful economic relations,”206 Wilcox declared. He concluded that “there can be no case in economics or in morality for anything more;”207 “more freedom that granted in the Charter would be a prescription for economic monarchy.”208
In response, Cuba expressed its frustration with the fact that within the developmental provisions of Chapter V of the Charter Draft, all of the restrictions and instruments were proposed by the “experienced nations” in a “take it or leave it bargain” presented to the developing countries.209 It noted that none of the institutional developmental proposals in Chapter V had been proposed by the countries that would, in fact, implement these measures – “the undeveloped countries - almost uncivilized countries.”210 On this situation, the Cuban delegation suggested that developing countries were facing the contradiction of facing a “take it or leave it" deal in a context in which it is as bad to take it as to leave it.”211 Lebanon explained the hard decision facing developing countries at the time:
“While the under-industrialized countries are deprived of the use of the most effective means for achieving their own development by their own efforts, they are not assured of receiving assistance by definite positive international action. To put it rather crudely;
206 See Twenty-Second Meeting of the Second Session, supra note 124, at 13–14. 207 Id. at 16. 208 Id. at 17. 209 Id. at 39. 210 Id. at 40. 211 Id. page 51
they are told ‘You can buy the machines to build factories, but you are not allowed to use effective means to keep these machines running’.”212 Sarcastically, Cuba explained that it once again found itself questioning the bargain struck by the UK and the US:
“How do you dare to try to make better what old experienced men have done? […]we will be very glad with the liberty of the jungle if the kind of charter which is going to come out of this goes in the way that it is shaped at this moment, because sometimes the liberty of the jungle is more healthy than the very sophisticated and civilized world.”213 It is fair to say, therefore, that rules that privileged specific industries in different countries would also impact the distributional consequences of each country’s production property in global trade, equating property rights with sovereignty. As Trebilcock and Howse note “specialization patterns of many developing countries could with justification be viewed as the historically contingent product of colonialism” suggesting “not only the artificiality of existing comparative advantage in developing countries but also its foundation in fundamentally unjust power relationships.”214
Cohen linked the allocation of specific property rights, or in this case, the comparative advantage to buy and sell products, to the existence of government as a ‘guarantor’ of this right. In this sense, Cohen understood that the definition of property was linked to the notion of government. Simply put, the main objectives of a government are also the main objectives of property. Proper management of property in society, therefore, has to be in line with the underlying ‘philosophy’ of the government. A government concerned with redistributing wealth will find a definition of property that works towards that purpose. A government concerned with maximization of economic output will organize property accordingly.
This realization is an important aspect of Cohen’s work. It is a helpful way to think about implicit degrees of government, contract, and force embedded in the understanding of property. In the realm of international organizations and the WTO, experts acquire this governmental role of allocation, by interpreting the rules and defining appropriate balances between the different goals to be achieved.
212 Twenty-Sixth Meeting of the Second Session, supra note 123, at 4. 213 See Twenty-Second Meeting of the Second Session, supra note 124, at 37–38 214 MICHAEL TREBILCOCK ET AL., THE REGULATION OF INTERNATIONAL TRADE 485 (4th ed. 2012) (1995). page 52
Along the same lines, Polanyi’s famous “The Great Transformation”215 asserts that 19th- century liberalism wrote its obituary in its failure to understand how societies are constituted. For him, the social and technological upheaval in Europe culminated in the elaboration of the idea of the ‘self-regulating market’ transforming the motives of the members of the society from subsistence to gain.216 As a consequence, institutions such as the balance of power system, the gold standard, and the liberal statehood were built to serve this economic logic and began to falter when they were no longer congruous with expanding national economies.217
Polanyi is guided by three general ideas. First, although markets have historically been a part of societies, only recently they have become the ordering principle of society. In this sense, the market economy is not as a natural and universal societal organization as economic liberals espouse it to be. In Polanyi’s words, “however natural it may appear to us to make that assumption, it is unjustified: such a system is an institutional structure which, as we all too easily forget, has been present at no time except our own, and even then it was only partially present.”218 Here, Polanyi’s idea is that the market is not separate from society, but the opposite: that the economy is embedded in social relations.219 Therefore, because markets are ‘submerged’ in society, it is societal distribution, not economic gain that structures the market. People do not act to safeguard their material goods, but rather to safeguard social standing, claims, assets.220 Thus, Polanyi finds that institutions such as religion, politics, and family have controlled markets in the past without subsuming the social logic underlying it.
Second, another important factor that seems to guide Polanyi’s explanation for collapse is an overarching belief in the strength of the idea of ‘gain’. For him, the reconceptualization of the economy as the ‘economization’ of gain bestowed an almost mystical power to the institution of the ‘self-regulating market’. He explains that the ‘self-regulating market system’ gained its strength due to the underlying motive, justification, on the idea of gain.221 This strength allowed this one institution – the self-regulating market – to reaffirm itself as the common matrix that shaped all other institutions in 19th-century civilization. For instance, in order to
215 KARL POLANYI, THE GREAT TRANSFORMATION: THE POLITICAL AND ECONOMIC ORIGINS OF OUR TIME (1944). 216 Id. at 42. 217 Id. at 29. 218 Id. at 3. 219 Id. at 57. 220 Id. at 43–55. 221 Id. at 30. page 53 stabilize currencies, policy-makers had to establish laws and institutions that in effect restricted trade and foreign payments despite their underlying belief in ‘self-regulating markets.’ Polanyi argues
“it would be hard to find any divergence between utterance of Hoover and Lenin, Churchill and Mussolini, on this point [...] It was the invisible realty to which the will to live could cling, when mankind braced itself to the task of restoring its crumbling existence”222
A third important thesis in “The Great Transformation” relates to the “double movement” created by the market. According to Polanyi, certain social actors benefit the most from the commodification of the economy than others. These actors (merchants, financiers, landowners) successfully push the market to become the principle institution structuring economic life (as opposed to redistributive institutions). This first move causes the market to have a destructive social effect by unleashing political power and respond with a countermovement demanding and creating laws and institutions in order to ameliorate the ensuing social disruption.
It is the ideational and political struggle over defining the society that shapes the market and other institutions. This understanding refers back to Hale and Cohen in the sense that markets are institutions that are always interacting with other institutions in society. Like Polanyi, legal realists argued, “a free market system could not be distinguished in a significant sense from a regulatory system”223. There is not a separation between these institutions and their capacity to shape the economy. In The Great Transformation, institutions (or laws) are created to establish the market’s role as a primary institution governing society; and laws are created as a pushback effect of the double movement reaction to minimize the market’s destructive effect. Institutions can structure the market and/or organize the countermovement against advances of the market society.
These realist insights suggest that the law expressed through the work of legal practitioners and thinkers, defines and creates understandings, meanings, and knowledge related to the world economy. In international trade law, this translates into concepts that define who creates wealth, what is wealth and how it is distributed. The importance of the legal realists’ work lies in understanding the limits and possibilities for state action within the trade law regime due to the very nature of the legal regime. That is to say, the work of legal realists
222 Id. at 25. 223 Joseph William Singer, Legal Realism Now, 76 CALIF 465, 482 (1998). page 54 provide perspective as to yet another level of where underlying political choices are made; and how they impact a countries status and possibilities within the global trading system.
b. The Role of Experts
Expertise and experts can operate to naturalize policy choices and depoliticize trade in different ways. Wilkinson explains that expertise provides a rigid and stylized way of talking about trade that presents a historical logic, metaphors, and constructed identities as facts. From these originating narratives, expertise develops standards of behavior as well as reasoning and arguing that map what is deemed acceptable and what is not. Through the pre- selection of discourses and arguments that emanate from these founding narratives, expertise limits what is possible in a myriad of economic rationales, ideological preferences, and distributive outcomes.
When analyzing the role of experts in global governance institutions, David Kennedy argues that one must look beyond the decision-maker to the practices of the institution.224 He argues that the ‘background workings’ of institutions should also be included in what is considered the political world. For him, foreground politics (regulations, public decisions, government actions, formal laws) is erroneously portrayed as the main forum for political decision- making. He argues that focus on foreground politics results in the overseeing of a background sphere of decision-making that takes place in expert opinions, legal, private, interpretation, and market forces. Within this intrinsic political nature of international law, lies a background system that “generates identities […] and allocates powers and resources in ways that might be interpreted, with all the benefit of distance or hindsight, a constituting system.”225 The role played by experts not only reifies the contours of the system and the options available for its actors but also naturalizes these choices as the logic of the system itself.226 Importantly, Kennedy’s suggested approach is helpful insofar as it helps to unveil mistakenly expert claims for truths regarding the world.227
Experts often sustain their position as ‘background’ by allocating the political elsewhere. It thus becomes difficult to separate what is ‘political contestation’ and what is expert
224 DAVID KENNEDY, A WORLD OF STRUGGLE: HOW POWER, LAW, AND EXPERTISE SHAPE GLOBAL POLITICAL ECONOMY 3 (2016) 225 Id. at 55–56. 226 Id. at 75. 227 Id. at 75–86. page 55 vocabulary directed at advising, interpreting, and implementing foreground decisions.228 As a result of this armed struggle over the allocation of the political, the idea of international governance must be relativized. Foreground politics should not be thought of as a simple manifestation of the factual, cultural, social contexts blurring responsibility of actors in the foreground. Rather, foreground politics should be studied as a translation and interpretation exercise undertaken by a background of experts who are themselves guided by biases and capable of decision-making.229
According to this logic, experts are the ones who often decide what the foreground, its context and its relationships are. They distinguish the public regulation from the private ordering, the dynamic world of the market from the context of factor endowments and preferences actors bring to the table. Quite simply, it is the background experts who give the context a real meaning and understanding in real life. Thus, Kennedy argues that there is very little that is not better understood through the lenses of background decision-making.
The foreground, to the contrary, increasingly seems like a spectacle to reflect decisions that have already been taken at the background and is every time more colonized by the background decision-makers.230 Looking at the background decision role of experts in general is important for three main reasons. First, ignoring the work of background experts clouds our understanding of what is happening in the informal and routine aspects of politics. Second, this focus helps to change our image of the international legal regime to include other specific regimes (industry regimes, for instance) that alter the shape of the international framework by setting their concurrent regulations. Third, it provides a clearer idea of what is politically feasible in international politics.
According to Kennedy, expertise can shape how problems are defined and limit the range of possibilities available to the decision-maker. Experts imagine the governing authority as the governing authority, the economy as the economy, law as the law. These experts usually share a set of common assumptions as well as issues in which they disagree within the broader field of their expertise. They share common premises and debate different approaches that emerge from those premises. Patterns of professional arguments arise in each field of expertise overtime, enabling areas of knowledge to be more accurately characterized
228 Id. at 11. 229 Id. at 9. 230 Id. at 12. page 56 as a group of people pursuing a common language. Professionals make arguments about choices that produce outcomes. Experts dispute alternate policies and doctrines which they think will lead to different outcomes and reference broader theories, methods, and political commitments to base their claims. According to Kennedy’s scheme:
Figure 2: The Logic of Experts
Even though experts differ in the choices they promote, they share a style or a consciousness that is subtly endorsed by them. This is a recognition that their premises and consciousness are compatible with the full range of alternative theories, methods, or political disagreements in their field. As the figure shows, the range of alternatives, they draw upon is limited to the possible linkages within the expert consciousness. They share a common understanding about what constitutes a viable method, politics, theory in the field, and what outcomes may result of unpacking them into policies and doctrines.
In this sense, expertise makes vertical associations in a common language amongst several policy/doctrines and theories/methods that are available to them using shared understandings of what expertise consists of in their specific field. They will honor these set of compatible theories/methods/outcomes and disagree as to the horizontal associations linking them. page 57
231 Figure 3 From GATT to “WTO Speak”
• "Mutually advantageous • “Necessary to achieve arrangements" policy objectives” “Arbitrary or unjustifiable discrimination” “Less trade restrictive alternatives”
Limited Open Government Markets Intervention
Efficiency Growth
• “More integrated, viable • “With a view to and durable multilateral expanding production of trading system through trade in goods and liberalization” services”
c. Destabilizing the Narratives of Trade Expertise
In admitting that political choices are filtered through the work of experts, strategies and tools are needed to identify the political biases of this process. Kennedy suggests three main approaches for doing so. First, by assessing the distributive social outcomes of the decisions. Second, by focusing on the specific lenses through which experts view a problem to better understand where their blind spots lie. Last, by investigating the experience of the expert as she makes a decision and exerts discretion. To do so, this Section outlines strategies used by experts operating within the trading system that effectively influence the distributive outcomes of the decisions, the lenses through which problems are framed and how experts experience political discretion.
First, when trying to map the political bias of a specific decision or expert, it is helpful to outline the “commonsensical” narrative that underlies it. For any field to be perpetuated, it is necessary that specific foundational ideas be sustained as being ‘right.’ It is precisely because commonsense is widely spread and reflects the wisdom of dominant ideologies that it is seldom challenged.232 Yet, it is for that same reason that it needs to be questioned, Wilkinson
231 Terms referred to are to be found in the provisions of the Marrakesh Agreement for the World Trade Organization, GATT, and TBT. 232 Wilkinson, supra note 194, at 22. page 58 argues.233 The foundational basis for constructs and the presupposition of paths needs to be questioned if the intended distributive outcome is to be changed. For instance, the relationship between trade and war is a fundamental narrative that enabled the implementation of the trading system and that is often passed unchecked.234 Due to the authority positions held by Clair Wilcox, Jacob Viner, Adam Brown in the US as well as Keynes in the UK, the rhetorical link between international peace and trade became commonsensical, creating an imperative to compel countries to join the GATT system. This underlying narrative is at the basis of the post-war international economic system. The extent to which it is a reflection of a true imperative for peace or a true imperative for reconstruction the allied nations in the post-war changes the very terms in which countries may be compelled to join the system.
Second, the constant promotion of fear through the use of potential and imminent “catastrophes” as the alternative to the desired outcome by renowned authorities also continues to work as a mechanism to propel action in the recipients of the discourse. The use of expertise by authorities in the field combines the specific lingo to the place of prominence occupied by these figures to mold what is to be seen as the basis for discussions, disagreements, action in the field. Besides the use of the “catastrophe” mechanism, another common instrument used to mobilize a community is the “foe or threat” to the system. Drawing from the range of acceptable and unacceptable courses of action laid out by expertise, the use of an impending abstract further dissipates accountability and liability for results in the international system. The threat or foe may vary as to its form of institutional organization, a political ideology, company, or an up and coming industry or sector. Here, the movement analogies often used in ‘trade talk’ are also examples of the abstract threat of disaster should the working of the established system slow down. The comparison of the system to that of a ‘bicycle’ or ‘boat’ and the constant need for further liberalization or renegotiation is also another way to announce the impending doom and push actors towards specific behaviors.235
A third example of the use of expert language to direct country action has to do with the analogies that often make inaccurate comparisons to induce a specific rationale. An example of such a strategy is the direct comparison that is often made between the stages of
233 Id. 234 Id. 235 Id. at 29–31. page 59 development of a country and that of a child. The trade law system projects the idea that developing countries are countries in an initial stage of development, allocating value to the political choices of developed countries and disqualifying those of developing countries. Bhagwati says:
“the protection of infant industries against imports much too often tends to be indiscriminate and creates strong incentives for the infant producers to remain inefficient and to continue demanding protection which then becomes potentially difficult to remove. The result is that the infant does not learn and grows up wearing protectionist diapers into premature senility.”236
The idea of a constant and homogeneous developmental trajectory is an important way in which status quo is maintained in trade: privileging one developmental approach in detriment of others, one design of industrial policy as less ‘harmful’ than the others, one type of government as more adequate than the others. These concepts are both the result of naturalized economic preferences of a group of actors at a specific point in time and the lack of contestation about each of the logical steps taken in this line of reasoning. The figure below links some of the commonsensical logic behind the trading system. Ideally, each of the arrows would be a point of contestation as opposed to a logical consequence of one concept on the other.
Figure 4: The Logic of Common Sense
Critical Points of Contention Critical Points of Contention
236 Jagdish Bhagwati, Reshaping the WTO, 168 FAR E. ECON. REV. 25 (2005); Wilkinson, supra note 194. page 60
Another tool often used is to adopt a specific point of reference, or comparator to guide policy making. In the trading system, the neoliberal paradigm fixed the state as the central point to analyze what counts as a ‘modern state’ largely depends upon “what should or should not fall within the state’s domain, what is public and what private, what is and is not within the state’s competence.”237
The answer to this question is shaped by the adoption of a particular problematic that demands adjustments to the practices of state power: the central issue of ‘governing too much.’238 This problematic is intrinsic to the adoption of liberalism as the critical ethos and practice of modern states. The measure of what “governing too much means,” Sinclair explains, does not evolve along a single, discernible trajectory:
“Ideas and practices that are rejected as being overly interventionist at one time may be retrieved, reconfigured and put to use again at a later date; and techniques of government that may be considered inappropriate in ‘advanced’ states may be justified simultaneously as necessary for the tutelage of ‘backward’ or ‘infantile’ societies”239
The adoption of the problematic of “the limits of governance” as the paradigm of the post- war liberal economy, helps to explain how states’ structures, policies, and practices are reconstructed within the logic of what is “too much” regulation within the ideological space of organizations. These international structures, Sinclair argues, were constructed within a neocolonial rationale that is internal to liberalism.240 His assertions relate to this investigation insofar as the measure of “too much” regulation is deeply embedded in the language and categories of law – closely resembling the 19th-century legal-rational authority feature of liberal thought and practice.
Nonetheless, Sinclair’s theory is that law is not only the instrument through which sovereign power is enabled, but it is also a place of political contestation that defines the boundaries between the beginning and the end of state regulatory autonomy according to varying conceptions of sovereignty and state. In this logic, the legal structure of the international system pushed for in the post-war institutions was only a relative development for developing and least-developed countries: it adopted and diffused the central liberal issue of “too much
237 Wilkinson, supra note 194, at 29. 238 MICHEL FOUCAULT, SECURITY, TERRITORY, POPULATION: LECTURES AT THE COLLÈGE DE FRANCE, 1977-78, at 385 (Michel Senellart et al. eds., Graham Burchell trans., Springer 2007) (2004). 239 Guy Fiti Sinclair, State Formation, Liberal Reform and the Growth of International Organizations, 26 EUR. J. INT’L L. 445, 457 (2015). 240 UDAY SINGH MEHTA, LIBERALISM AND EMPIRE: A STUDY IN NINETEENTH-CENTURY BRITISH LIBERAL THOUGHT 20, 31–33 (Univ. of Chi. Press 2018) (1999). page 61 governance” as its central paradigm, pushing for specific uses of law as the standard of measure of legal-rational governance.
Tellingly, the measure of legal-rational governance in keeping the issue of “too much governance” or of “state intervention in the economy” as the main test for sound economic policy, the post-war system automatically recriminated some policies in respect of others, regardless of their effects, their contextual appropriateness or the historical sense. In this sense, whether we call it the “liberal” approach to trade law or “protectionist” trade policies, the compass to measure their appropriateness was always the subjective question of what is the appropriate amount of “state governance,” ignoring specific country issues, historical trajectories or social preferences.
Howse explains that the notion of “government intervention” was taught as the predominant normative orientation of IEL since the very beginnings of the discipline.241 He describes the logic adopted in the post-war system of international economic law as
“law being an instrument that serves rational international economic policy; rational policy is about efficiency; efficiency leads to growth; efficiency requires open markets, with strong protection for property and contractual rights and disciplines on government intervention.”242
This approach to the discipline determined the boundaries of international economic law as a discipline243 and led international lawyers to think of IEL as a neutral technique244 for controlling who, what, which rules, actors and knowledge are legitimate in the discipline.245 Howse argues that this approach to IEL instrumentalized law as a neutral tool to enforce generally accepted liberal predicaments about how the economy works as well as the logical causal relationships it takes for granted. For instance, the above-mentioned causal relationship between efficiency, open markets, consumer preferences, contractual rights, and government intervention might not be as straight forward as originally put forth by the IEL. This approach operated not only to depoliticize international economic law but also to
241 Robert Howse, Economics for Progressive International Lawyers: A Review Essay, 5 LONDON REV. INT’L L. 187, 188 (2017). 242 Id. 243 Rafael Lima Sakr, Beyond History and Boundaries: Rethinking the Past in the Present of International Economic Law 22 J. INT’L ECON. L. 57 (2018). 244 Id. at 4. 245 Id. at 5. page 62 insulate it from questions of social justice and economic redistribution, placing issues such as environment, human rights, and development outside the fields’ domain.246 This approach to IEL has understood the law as a mere instrument upon which to guide global governance even though embracing this economic approach meant leaving out a much broader set of potentially relevant legal, economic and political ideas.247
The political nature that underlies the concept of policy space shows how this concept is best understood through its epistemic and definitional struggle. This understanding indicates the forms that politics takes in particular moments, opening up spaces for contestation and reform. It is especially relevant as developing countries, given that the international world is the product of intense and ongoing projects of regulation and institutional management. Small changes in the rules can shift who wins and who loses. Law is often at struggle because it distributes: allocating and protecting gains from economic activity or political conflict.
Sinclair’s argues that “legitimate demands sensitivity to contingency, contestation, and change over time, allowing us to trace a -history of the present- of international law.”248 As such, it is possible to trace the emergence and legitimization of some of the most significant techniques of international intervention that shape our political world and its distributive consequences. A look at critical moments suggest that contemporary forms of international intervention are less inevitable than they may currently appear, and to open up spaces for thinking differently about the possibilities and perils of international law.249
C. Concluding Remarks
This Chapter used different approaches to show that policy space is not solely what international economic law chooses not to forbid.
First, the Chapter set out an initial framework upon which to better analyse policy space. Besides the initial analysis of the relationship between domestic economic measures and international trade law to define policy space, this dissertation expands this approach by including three other regulatory influences. It argues that the proposed comprehensive
246 Howse, supra note 241, at 188–89. 247 Id. 248 Sinclair, supra note 239, at 452. 249 On genealogy and histories of the present, see COLIN KOOPMAN, GENEALOGY AS CRITIQUE (2013); Mark Bevir, Rethinking Governmentality: Towards Genealogies of Governance, 13 EUR. J. SOC. THEORY 423 (2010); Robert Castel, “Problematization” as a Mode of Reading History, in FOUCAULT AND THE WRITING OF HISTORY 237 (J. Goldstein eds., 1994). page 63 assessment of regulatory influences is necessary to assess how countries enjoy qualitatively different experiences of policy space and what is the distributional consequence of the totality of norms that operate within international trade relations among states.
Second, the Chapter presented ways to think about how economic and political choices are embedded in international trade agreements and how they relativize the economic gains and autonomy to different countries under the same international trade system. The Chapter showed how institutional dynamic of differences present in international trade law translates into different experiences of constraint or autonomy for each country. It then exemplified how, in the development of the trading system, contingent economic preferences defined what were deemed to be appropriate institutional mechanisms for economic development as opposed to others. Last, the Chapter argued that the difference between policy space and effective institutional neutrality could also be understood through the optics of experts and the manners in which they propagate certain language, practice, and narratives. Combined, these approaches illuminate the political struggle hidden in the notion of policy space.
II. CHAPTER 2: POLICY SPACE AND THE AUTO INDUSTRY AFTER THE ESTABLISHMENT OF THE WTO
A. The Case of Brazil
In the early 1990s, the agenda of economic liberalization spread rapidly around the globe. Both developed and developing countries embraced neoliberal reforms. Globalization, deregulation, privatization, welfare state cutbacks, regressive taxation, and overall government downsizing, became policy trends adopted across the globe. These reforms were secured in a period in which policy-makers came to see liberalization as important, if not necessary, to extricate themselves from the economic crisis of the 1970s.
The World Trade Organization was established in this context. In 1995, one hundred twenty- four countries signed the Marrakesh Agreement, a majority of which were developing countries.250 Engulfed in the neoliberal waves, countries were expected to adapt their regulatory frameworks to the prevailing economic guidelines embedded in international trade governance. WTO members initiated substantial domestic reforms in areas such as export subsidies, quantitative restrictions, agricultural subsidies, import licenses and non-tariff
250 Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T.S. 154 [hereinafter Marrakesh Agreement]. page 64 barriers, sanitary and phytosanitary standards while guaranteeing overall minimum access of imports to their markets.
Nonetheless, the prevalence of neoliberal policies was not without its critics. The prospect also caused skepticism among groups of developing countries, specific sectors, and interest groups within their economies. They voiced concern that WTO Agreements would restrict their ability to implement the developmental policies they deemed necessary. Crucially, governments were concerned with how the agreements would affect their regulatory policy space.
In Brazil, the guidelines of the Washington Consensus doctrine were taken to heart,251 and in a short period of five years (1990-1995) tariff and non-tariff barriers were taken down across the board. The tariff reduction effort gradually reduced import tariffs on capital goods, inputs and consumption goods from 105 percent to 32 percent for the highest tariff rates, from 40 percent to 20 percent for the modal tariff and from 32 percent to 14 percent for the average tariff. 252 Further, Brazil reduced tariffs within MERCOSUR with a view to meeting occasional price stabilization needs for those goods in the domestic market.253
As the country embraced the sweeping wave of liberalization, one industry was especially vocal about the potential negative consequences it would have on the development of the national industrial base. The Brazilian automotive sector, historically reliant on government support and tariff protection, found itself forced to face international competitive pressures and to restructure itself. Automobile companies strategically simplified, standardized, and globally outsourced their work processes.254 Brazil’s automobile sector saw an increase of FDI flows and of new production processes that promised to reduce costs and to modernize the industry.255 By 1995, the price for nationally produced light vehicles had decreased by 40 percent when compared to that of 1991, and worker productivity almost doubled within the
251 Marcelo de Paiva Abreu, Trade Liberalization and the Political Economy of Protection in Brazil Since 1987 (Inter-Am. Dev. Bank, Working Paper No. 2642, 2004). 252 Id. 253 See Communication from the Permanent Mission of Brazil, Notification Under Paragraph 9 of the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994, WTO Doc. WT/BOP/N/4 (Jul. 17, 1995) [hereinafter Notification Under Paragraph 9]. 254 TIMOTHY STURGEON & RICHARD FLORIDA, RESEARCH NOTE: THE GLOBALIZATION OF AUTOMOBILE PRODUCTION (1997). 255 Simone Gobbo et al., Uma Análise das Estratégias de Manufatura Adotadas por Seis Montadoras da Indústria Automobilística Mundial, 5 REV. GESTÃO DA PRODUÇÃO, OPERAÇÕES E SISTEMAS 11 (2010). page 65 same period of time.256 The fast-paced liberalization of the sector, however, also led to an upsurge of imports to the detriment of the domestic industry. The government regarded the upsurge as unsustainable from a balance-of-payments perspective and highly damaging to domestic industry.257
From 1994 onwards, aiming to support the industry in the change to free markets, the government opted for a more conservative process of liberalization. It intercalated liberalization efforts with specific sector regulations for the continuation of developmental policies, relying on fiscal and financial incentives, national content requirements, and closed markets.258 To that end, over thirty different legal instruments were edited and adopted to support and re-regulate the Brazilian auto industry.259 In addition, numerous agreements and compromises were set up to coordinate interests in the sector.260 The most significant among these instruments was the New Auto Regime.261 The New Auto Regime (as well as its subsequent editions) would become the main instrument to regulate the auto industry in Brazil up to the present day.
256 Marco Aurélio Bedê, A Política Automotiva Nos Anos 90, in DE JK A FHC: A REINVENÇÃO DOS CARROS 357 (Glauco Arbix & Mauro Zilbovicius eds., 1997). 257 Danny Lawpziger et al., MERCOSUR:Integration and Industrial Policy, 20 WORLD ECON. 585, 599 (1997). 258 Carlos Galperin, Brasil: La Politica para el Sector Automotriz. Informe 4/95 Buenos Aires: Centro de Economia Internacional, Ministerio de Relaciones Exteriores Comercio Internacional y Culto. Gazeta Mercantil (São Paulo, 1995). 259 Law No. 9.449, 14 March 1997, DIÁRIO OFICIAL DA UNIÃO [D.O.U.] 15.3.1997; Law No. 9.440, 14 March 1997, D.O.U. 15/3/1997; Law No. 1.602, 14 November 1997, D.O.U. 17/11/1997; Decree No. 2.706, de 3 de August 1998, D.O.U. 04.08.19998; Decree No. 2.638, 29 June 1998; Decree No. 2.391, 20 November 1997, D.O.U. 8/12/1997; Decree No. 2.386, 14 November 1997, D.O.U. 17/11/1997; Decree No. 2.375, 11 November 1997, D.O.U. 12/11/1997; Decree No. 2.307, 20 July 1997; Decree No. 2.179, 18 March 1997), D.O.U. 19/3/1997; Decree No. 2.072, 24 November 1996; Decree No. 1.987, 20 August 1996, D.O.U. 30/8/1996; Decree No. 1.863, 16 de April 1996, D.O.U. 17/04/1996; Decree No. 1.761, 26 December 1995, D.O.U. 27/12/1995; Decree No. 1.427, 29 March 1995, D.O.U. 30/3/1995; Decree No. 1.391, 10 February 1995, D.O.U. 13/2/1995; Provisional Measure No. 1.532, 18 December 1996, D.O.U 19/12/1996; Provisional Measure No. 1.483, 5 February 1996; Provisional Measure No. 1.235, 14 December 1995, D.O.U. 15/12/1995; Provisional Measure No. 1.024, 13 June 1995; Portaria Interministerial No. 3, 31 March 1997; Portaria Interministerial No. 1, de 5 de January de 1997, D.O.U. de 29/01/1997; Ordinance MF 506/94 (22 September 1994); Ordinance MEFP 131/92 (18 February 1992); Ordinance MEFP 58/91 (3 January 1991); Ordinance MEFP 259/90 (31 May 1990); Sector Chamber Agreements of 1992 and 1993. 260 For the important regulatory milestones for the Brazilian auto industry, see Juscelino Kubistschek, Plano de Metas (upgrading the automotive industry to a center of the modernization of the Brazilian economy). See also the creation and workings of the Executive Group of the Automobile Industry (Grupo Executivo da Indústria Automobilística - GEIA); Collective Agreements and Sector Chambers (Câmaras setoriais) involving workers, private sector and the state and their role in influencing the sector's objetives and planning. See generally DE JK A FHC: A REINVENÇÃO DOS CARROS, supra note 256. 261 The New Auto Regime was first established by the Provisional Measure No. 1.024, de 13 de June de 1995, D.O.U. de 14/6/1995, and implemented by Law No. 9.449, de 14 de March de 1997, D.O.U. de 15/03/1997. See João Negri, O Custo do Bem-Estar do Regime Automotivo BrasiLawro, 29 PESQUISA E PLANEJAMENTO ECONÔMICO 215 (1999). page 66
The clash between the newly implemented WTO Agreements and the New Auto Regime was characteristic of the wave of market liberalization of the 1990s. Traditionally, the Brazilian auto industry had been one of the country’s most protected industrial sectors and had counted on generous government support from its early days in the 1950s. With the establishment of the WTO, however, most of the policies now embodied in the New Auto Regime were no longer permitted by the international system. As such, the 1995 New Auto Regime initiated a trend that remains in place today: the questioning of Brazilian auto sector measures at the WTO. The Brazilian auto industry sector and national interest groups saw this as an unwelcome new tradition. They vehemently criticized the government’s loss of regulatory autonomy and the inability to maintain measures that the sector had counted with since its establishment. The debate of policy space and regulatory autonomy (see Chapter I) gained traction and the WTO came under widespread criticism from mainly developing countries.
This first case study is divided into six parts. The first part offers a description of the New Auto Regime implemented in Brazil in 1995 as well as its main legal and economic aspects. The second part provides an overview of the traditional narrative of policy space constraints under international law. It references the challenges Brazil encountered when designing an auto policy regime under the MERCOSUR and WTO Agreements. The third part describes how aspects of the Brazilian domestic legal system influenced the government’s ability to implement its desired policies. The fourth part argues that corporate governance and global value chain structures imposed further constraints on the national government’s ability to regulate. The fifth Section outlines other regulatory influences that Brazil encountered when adapting its auto industry regime to car emissions standards as well as fuel efficiency regulations. The sixth and final part offers an overview of the case study and concluding remarks.
1. The 1995 New Auto Regime
The Fernando Collor and Itamar Franco governments (1990-1994) in Brazil were periods of rapid economic liberalization for the Brazilian automobile sector.262 Between 1990 and 1994, the import tax for vehicles in Brazil went from 85 percent to 34.3 percent.263 The rapid opening of the market caused steep decreases in sales for domestic producers and a dramatic
262 ALEXANDRE COMIN, DE VOLTA PARA O FUTURO: POLÍTICA E REESTRUTURAÇÃO INDUSTRIAL DO COMPLEXO AUTOMOBILÍSTICO NOS ANOS 90, at (1998). 263 For a database of the automobile industry DIPPP/IPEA, see João Negri, O Custo do Bem-Estar do Regime Automotivo BrasiLawro, 29 PESQUISA E PLANEJAMENTO ECONÔMICO 215 (1999) (Braz). page 67 loss of jobs in the automotive industry. From January to May 1995, automobile imports increased 412.7 percent as compared to the same period of the year before, while total imports grew by only 55.3 percent.264
In May 1990, the first BMW assembly plants were established in Brazil. Within six months, the Russian assemblers Niva, Laika, Samara also found base in Brazil. After 1991, with the founding of the Brazilian Association of Importers and Producers of Automotive Vehicles (Associação Brasileira das Empresas Importadoras e Fabricantes de Veículos Automotores – ABEIVA), further helped to establish Citroën, Lada e Mitsubishi. Less than four years later, ABEIVA’s membership was composed by over thirty international manufacturers.265 Through ABEIVA’s efforts, the first “wave of newcomers” started in Brazil. Before the 1990s were over, fourteen manufacturers were already producing in Brazil.
The sudden liberalization gave rise to discontent among local players. The rapid changes left Brazilian auto producers unusually exposed as they were no longer safeguarded by the traditional governmental support they had been granted since the 1950s. From the 1930s to the early 1960s, the economic strategy in Brazil had been dominated by import substitution industrialization (ISI).266 Through the use of import licensing, tariffs, quotas, import prohibitions, overvalued exchange rates, and direct government investment, Brazil managed to establish a successful automobile industry and efficient steel production. This industry grew around a seemingly permanent set of public policies that promoted the development of domestic manufacturing through high trade barriers, state-owned enterprises, and subsidies. The reversal of the ideology associated with ISI had a profound impact and deeply disturbed key automotive industry players in the early 1990s.267
In an attempt to appease industry players, the government created Sectoral Chambers for the auto industry as fora to negotiate solutions between the government, industry, and workers.268
264 See also Notification Under Paragraph 9, supra note 253. 265 Among them, Asia Motors, Audi, BMW, Bentley, Bugatti, Chrysler, Citroën, Daewoo, Daihatsu, Ferrari, FSO (não chegou a atuar), Honda, Hyundai, Jaguar, Kia Motors, Land Rover, Lada, Lamborghini, Lexus, Lotus, Mazda, Mercedes-Benz, Mitsubishi, Nissan, Peugeot, Renault, Rolls Royce, Subaru, Toyota e Volvo. See “Abeifa, revolução no setor automotivo brasiLawro”. Available at: www.abeifa.com/Sobre 266 Marcelo P. de Abreu et al., Import Substitution and Growth in Brazil, 1890s–1970s, in INDUSTRIALIZATION AND THE STATE IN LATIN AMERICA 154 (E. Cardenas et al. eds., 2000). 267 Eliana Cardoso, Professor of Econ., Escola de Economia de São Paulo, Paper Presented at the Conference on the Political Economy of Trade Policy in the BRICS: Brief History of Trade Policies in Brazil: From ISI, Export Promotion and Import Liberalization to Multilateral and Regional Agreements (March 27–28 2009). 268 See also Patricia Anderson, Sectorial Chambers: Historic and Agreements –1991/1995 (Inst. of Applied Econ. Research [IPEA], IPEA Working Paper No. 667, 1999). page 68
The Chambers served to represent workers, companies, and the government around stable policy strategies for the industry. The Chambers negotiated two auto agreements (1992 and 1993), creating conditions for reestablishment of sales and improvement of labor relations. Also, the government attempted to temporarily curb the speed of the liberalization process by increasing the importation tax for vehicles from 32 percent in February 1995 to 70 percent in March 1995.269 A new auto policy, presented as “a general program for investment and exportation with a special import regime,” was introduced by Provisional Measure nº 1.536 of 13th February 1995, converted into Law nº 9.449, 14th March 1997.270
This “general program” was the embryonic form of the New Auto Regime, the most important policy instrument for the Brazilian auto industry since 1995. The New Auto Regime adopted an interventionist approach uncharacteristic of the general policy trends of the 1990s.271 It was significantly different from previous sectorial policies focused on modernization of work relations and strengthening of the domestic industrial base. According to Comin, the New Auto Regime had a more liberal character and represented a move away from the pure developmental tradition that had characterized the sector since the 1960s.272 He argues that although the New Auto Regime still contained a number of essentially developmental measures, the program established fiscal incentives and benefits to
269 See Decree No. 1.427, de 29 de March de 1995, D.O.U. de 30/3/1995. 270 In less than two years, the process of implementation of the New Auto Regime had more than twenty Provisional Measures and approved with countless edits until the final Law No. 9.449, 14 March 1997, D.O.U. de 15/03/1997, was approved. The Provisional Measures established between June 1995 and March 1997 were the following: Provisional Measure No. 1.536-22, of 13 February 1997, D.O.U. of 14.2.1997; Provisional Measure No. 1.536-21, 16 January 1997, D.O.U. de 17.1.1997; Provisional Measure No. 1.536, 18 December 1996, D.O.U. 19/12/1996; Provisional Measure No. 1.483-19, 29 November 1996, D.O.U. 30/11/1996; Provisional Measure No. 1.483-18, 31 October 1996, D.O.U. 1/11/1996; Provisional Measure No. 1.483-17, 2 October 1996, D.O.U. 4/10/1996; Provisional Measure No. 1.483-16, 5 September de 1996, D.O.U. 6.9.1996; Provisional Measure No. 1.483-15, 8 August 1996, D.O.U. de 9.8.1996; Provisional Measure No. 1.483-14, de 10 July de 1996, D.O.U. de 11/7/1996; Provisional Measure No. 1.483, 5 June 1996, D.O.U. de 7/6/1996; Provisional Measure No. 1.435, de 9 of May de 1996, D.O.U. de 10/5/1996; Provisional Measure No. 1.393, 11 April 1996, D.O.U. 12/04/1996; Provisional Measure No. 1.351, 12 March 1996, D.O.U. 13/3/1996; Provisional Measure No. 1.311, 9 February 1996, D.O.U. de 12/2/1996; Provisional Measure No. 1.272, 12 January 1996, D.O.U. 13.1.1996; Provisional Measure No. 1.235, 14 December 1995, D.O.U. 15/12/1995; Provisional Measure No. 1.200, 24 November 1995, D.O.U. 25.11.1995; Provisional Measure No. 1.165, 26 October 1995, D.O.U. 27/10/1995; Provisional Measure No. 1.132, 26 September 1995, D.O.U. 27/9/1995; Provisional Measure No. 1.100, de 25 de August 1995, D.O.U. de 28/8/1995; Provisional Measure No. 1.073, 28 de July 1995, D.O.U. 29.7.1995; Provisional Measure No. 1.047, 29 de June 1995, D.O.U. 30.6.1995; Provisional Measure No. 1.024, de 13 de June 1995, D.O.U. 14.6.1995. 271 For reasons for this uncharacteristic political choice, see Laura Gomez Mera, Macroeconomic Concerns and Intrastate Bargains: Explaining Illiberal Policies in Brazil's Automobile Sector, 49 LATIN AM. POL. & SOC’Y, 113 (2007). 272 COMIN, supra note 262. page 69 newcomers. The goal was to amplify and modernize the installed capacity in Brazil to then increase exports and attract foreign resources.273
Nonetheless, while most sectors of the economy were being liberalized, this new regime attempted to pace and regulate that process in the auto sector. The New Auto Regime contained three main elements: investment incentives, export promotion measures, and quantitative restrictions. Companies based in Brazil (or looking to establish themselves in Brazil) would be granted an authorization to import capital goods, inputs and vehicles with a reduction of the Import Tax (II)274 and the Industrial Products Tax (IPI)275 if they assumed commitments to invest/export.276 As defined by the regime, newcomers were the assembly plants and manufacturers that were looking to establish themselves in the country as well as new industries of already existing assemblers and manufacturers.277 After a challenging legislative ordeal and successive amendments, the initial measure was complemented by Provisional Measure nº 1.532/95 and later converted into Law nº 9.440, effectively constituting the New Auto Regime of 1997.278
The measures established an import tariff decrease for imported motor vehicles and a reduced requirement of 60 percent of local content parts in domestically produced cars.279 At the same time, there was a tax reduction of 2 percent for imported machines, equipment, and raw
273 COMIN, supra note 262. 274 The Import Tax (II) is used to regulate foreign trade, to stabilize the balance-of-payments at times of economic crisis, to protect and stimulate the growth of Brazilian industry and to encourage foreign investments. The rates vary according to the type of product imported and are frequently changed by the government by a decree, without the need of submission to Congress. The calculation basis of the Import Tax is the price at which the goods are offered for sale on the wholesale market of the exporting country, plus the cost of insurance and freight (CIF). It is charged upon the customs clearance of the goods. In case there is no national product similar to the imported product or if its national production is not sufficient for the demand of the internal market, reduction or exemption of the Import Tax may be granted. See PFK INT’L LTD., BRAZIL TAX GUIDE (2013). 275 The Industrial Products Tax (IPI) is a federal tax levied on most domestic and imported manufactured products. It is levied at the point of sale by the manufacturer or processor in the case of domestically produced goods. The tax rate varies by product and is based on the products' cost of insurance and freight (CIF) value plus duties. As with value added taxes in Europe, IPI taxes on products embodying several stages of processing can be adjusted to compensate for IPI paid at each stage. The IPI is established under the provisions of Law No. 5.172, de 25 October de 1966, D.O.U. 27.10.1966, the National Tax Code (Código Tributário Nacional), under Chapter IV, Section I. See also Law No. 4.503, de 30 de November de 1964, D.O.U. de 5/5/1965; Decree No. 7.212, de 15 de June 2010, D.O.U. de 16/06/2010; Decree No. 6.759, de 5 February de 2009, D.O.U. de 06/02/2009; PFK INT’L LTD., supra note 274. 276 See Ações Setoriais para o Aumento da Competitividade da Indústria BrasiLawra, MINISTÉRIO DO DESENVOLVIMENTO INDÚSTRIA E COMÉRCIO, http://www.mdic.gov.br/spi/asac/asac0000.htm (last visited Oct. 10, 2019). 277 See Decree No. 2.072, de 14 de November de 1996, D.O.U de 18/11/1996, http://www.planalto.gov.br/ccivil_03/Decree/D2072.htm. 278 See Law No. 9.440, de 14 de March de de 1997, D.O.U. de 15.3.1997. 279 Mera, supra note 271, at 35–36. page 70 materials,280 based on export performance of the companies. Further, there was a 50 percent reduction for the import tax for the assemblers already established or with plans to establish plants in Brazil.281 Overall, instruments of tax reduction and tax exemption were increased and the use of local content requirements and export-based tax concessions based on output were also established.
The main objective of these measures was to attract new car companies and enhance the economic incentive to the large assembling plants in the countries. By attracting and encouraging the development of these large industries in the country, the government hoped to encourage industrial modernization and technological upgrades to guarantee posterior access of Brazilian products to the international market. 282 The regime set the objective to increase the production of vehicles in Brazil from 1.8 million to 2.5 million per year by 2000. This environment was meant to foster efficiency, information exchange and resource management.283 Benefits were expected to flow and to positively influence other sectors and companies in Brazil.
The new policy shifted power to the assemblers and to the incoming automotive companies. As a consequence, the private sector gained leverage in fiscal and tax policy negotiations. Assemblers acquired a prominent role in defining the structure of the auto parts sector, labor relations, and in regional and local development policies. The results came fast. Arbix reports that 16 large assembly companies, 150 auto-parts companies, and 29 companies of other productive sectors adhered to the program.284 Such expansion of the automotive industry had only been seen previously in the period of 1956 to 1968,285 a period Shapiro referred to as the ‘first great migration of assembly companies.’ Different from the ‘first great migration of assembly companies,’ this time around, foreign direct investment was not concentrated in the
280 Id. at 36 (explaining the new import tariffs in another way by noting that “[t]he regime reduced the tariff on imports of machinery and equipment by 90 percent; on auto parts, components, and other inputs by 85 percent (1996), 70 percent (1997), 55 percent (1998), and 40 percent (1999); and on finished commercial vehicles (purchased by local assemblers) by 50 percent”) 281 Bruna Casotti & Marcelo Goldenstein, Panorama Do Setor Automotivo: As Mudanças Estruturais Da Indústria E as Perspectivas Para O Brasil, BNDES SETORIAL, Mar. 2018, at 147. 282 Tullo Vigevani & João Veiga, A Integração Regional no Mercosul, in DE JK A FHC: A REINVENÇÃO DOS CARROS, 330 (Glauco Arbix & Mauro Zilbovicius eds., 1997). 283 Daniel Mesquita et al., Aspectos Institucionais da Inovação: Uma Análise Acerca Dos Regimes Automotivos BrasiLawros de 1995 e 2012, in CONGRESSO LATINO-IBEROAMERICANO DE GESTÃO DE TECNOLOGIA 15 (2013). 284 Andres Rodríguez-Pose & Glauco Arbix, Estratégias do Desperdício. A Guerra Entre Estados e Municípios por Novos Investimentos e as Incertezas do Desenvolvimento, 54 NOVOS ESTUDUS CEBRAP 55 (1999). 285 HELEN SHAPIRO, ENGINES OF GROWTH: THE STATE AND TRANSNATIONAL AUTO COMPANIES IN BRAZIL (1994). page 71 metropolitan area of the great São Paulo. Instead, it was mostly spread out over Paraná, Minas Gerais, Rio Grande do Sul, Bahia, and Rio de Janeiro.
The final reception of the program was mixed. Many saw the New Auto Regime as a successful enterprise.286 They refer to the policies’ success as 17 billion dollars of direct investment poured into the country from 1995 to 1999,287 inserting the country’s auto sector in the international global production and maintaining Brazil’s competitiveness amidst liberalization waves throughout the developing world.288 For instance, as a result of this regime, Renault and Nissan created an alliance in 1998, and Audi/Volkswagen moved to Paraná first, inserting themselves in the global supply chains.289 Arguably, the increasing competition forced established organizations to innovate to survive.290 The entry of new assembly plants in the national market forced large organizations to restructure with programs of quality check, automation, and new ways of interacting with the consumer base.291
Others argue that the New Auto Regime was not a positive experience. Pinheiro and Motta, for instance, criticize the lack of cohesive industrial policy planning and national strategy for development in the compilation and struggle of approved measures and legislations.292 Further, they argue that by electing a sector to generate excesses in the commercial balance, the government ended up financing the modernization of a sector whose strategic center and
286 Anuário Estatístico: 1957/1997, Associação Nacional dos Veículos Automotores (ANFAVEA), (São Paulo, 1998); see also ALESSANDRA RACHID ET AL., RELOCALIZAÇÃO INDUSTRIAL E NOVAS FORMAS DE ORGANIZAÇÃO DO TRABALHO (1998), http://www.abepro.org.br/biblioteca/ENEGEP1998_ART181.pdf. 287 . IVAN PINHEIRO & PAULO MOTTA, O REGIME AUTOMOTIVO BRASILAWRO (RAB) COMO INSTRUMENTO DE MODERNIZAÇÃO DO PARQUE INDUSTRIAL NACIONAL - UMA ANÁLISE CRÍTICA (2001) (Braz.), http://www.abepro.org.br/biblioteca/enegep2001_tr81_0042.pdf; Chuva de 21 bilhões - Brasil Recebe o Maior Pacote de Investimento da Indústria Automobilística em Todo o Mundo, VEJA, June 11, 1997 (Braz.) 288 Ângela Santos et al., Panorama da Indústria Automobilística na América do Sul, BNDES SETORIAL, SEPT. 1999, at 172. 289 Ricardo Torres & Silvio Antõnio Ferraz Cario, A Governança da Cadeia Global de Valor na Indústria Automobilística: um Estudo de Caso, 14 REVISTA ECONÔMICA - NITERÓI 73 (2012). 290 Douglass North, The New Institutional Economics and Third World Development, in: THE NEW INSTITUTIONAL ECONOMICS AND THIRD WORLD DEVELOPMENT 17 (John Harriss, et al. eds., 1995). 291 Ivan Pinheiro, Uma Avaliação Ex-ante do Impacto Sobre a Capacidade Tecnológica da Localidade Acolhedora das Empresas que Aderiram ao Regime Automotivo BrasiLawro e os Seus Desdobramentos Estaduais: O Caso da Instalação da General Motors do Brasil em Gravataí Rio Grande do Sul (Jan. 2001) (unpublished D.B.A. dissertation, Universidade Federal do Rio Grande do Sul)(on file with Universidade Federal do Rio Grande do Sul). 292 Glauco Arbix & Andrés Rodriguez-Pose, Estratégias do Desperdício: A Guerra Entre Estados e municípios por novos investimentos e as incertezas do desenvolvimento, 54 NOVOS ESTUDOS CEBRAP 55 (1999). The New Auto Regime significantly impacted Brazil. Its proponents also mention that, before this regime, only four companies worked in Brazil, whereas, afterwards, Ford was established in the state of Bahia; Mitsubishi in Goiás; Mercedes Benz and Fiat-Iveco in Minas Gerais; Chrysler, Renault and Audi-Volkswagen in Paraná; Volkswagen and Peugeot-Citroen in Rio de January; General Motors and Navistar in Rio Grande do Sul; and, finally, Honda, Toyota, and Land Rover in São Paulo. page 72 beneficiaries were located beyond national borders. Critics also put forward the idea that the additional “regional program” that conferred additional benefits to Northern, Northeastern, and Center-Western states provoked a violent fiscal reaction from states in the South and Southeast. In order to compete for investments and to surpass the benefits conferred by the “regional program,” Southern and Southeastern states established new stimuli to attract assembly companies and supply chain, providers. The case of the General Motors plant in Gravataí, Rio Grande do Sul, is quite emblematic of this struggle as the location of the plant was disputed by 12 states and, only in Rio Grande do Sul, by 150 municipalities.293 Although an evaluation of the New Auto Regime as a developmental and industrial policy is not within the scope of this paper, these perspectives shine a light on the deeply divergent domestic opinions and some of the roadblocks that it found on its implementation and operation.
2. International Rules
International regulation directly affected the fate and success of Brazil’s industrial sector in two ways: regionally, with the establishment of MERCOSUR and the common external tariff, and, internationally, with the establishment of the World Trade Organization and its agreements in 1994. In those two instances, the Brazilian New Auto Regime for the auto industry was put to test and the country was forced to rethink the bias of its fundamentally developmental and closed automobile sector.
a. The Mercosur Effect
Regionally, the New Auto Regime generated controversy amongst MERCOSUR members.294 Brazil, Argentina, and Uruguay had been involved in intensive negotiations since the mid- 1980s in an attempt to integrate their economies. The agreement created the outline for an integrated economy and a customs union to be progressively consolidated with the purpose of the creation of a common market.
Three months after the signing of the Treaty of Asunción, a tariff reduction of 47 percent was approved for products commercialized within MERCOSUR. In January 1995, a Common External Tariff (CET) for all MERCOSUR members was implemented by Decision 22/94 of
293 Pinheiro, supra note 291. 294 The Treaty of Asunción was originally signed by Brazil, Paraguay, Uruguay and Argentina on March 26th, 1991 and created the necessary mechanisms to implement a common market. MERCOSUR was later established as a juridical person through the Ouro Preto Protocol in December of 1994. Venezuela later became a full member on July 31, 2012. page 73 the Council of the Common Market (CMC).295 The CET was common to Brazil, Paraguay, Uruguay, and Argentina and applied to products from outside the region.296 The creation of MERCOSUR increased the commerce flux amongst its Member countries. Overall, trade flows increased by 300 percent between Brazil, Paraguay, Argentina, and Uruguay. The agreement became an important variable in the future structuring of Brazil’s industrial policies for many sectors, in particular, manufacturing and the auto industry: between 1991 and 1995, intra-sub regional exports grew at an annual rate of 29.6 percent, in comparison to 11.3 percent for total exports.297
These regional developments had far-reaching impacts for MERCOSUR’s automotive industry. There was a rapid expansion of domestic production and a drastic fall in prices in both Brazil and Argentina. More flexible local content requirement rules fostered the production of higher quality models.298 Further, new entrants such as Renault, Mercedes- Benz, Kia, and Asian Motors entered the MERCOSUR market and helped to set up complementary production lines between Brazil and Argentina.299 Such developments led to an expressive increase of intra-bloc commerce in automobiles between the two countries: by 1993, the intra-industry trade in automobiles coefficient for Brazil and Argentina reached 39 percent for the automotive industry in the total of trade in 1993.300
Further, to regulate auto commerce between countries within the bloc, two main agreements were established.301 One, between Brazil and Argentina, set out annual quotas for tariff free exported vehicles and auto parts in a manner to establish balanced exchange conditions
295 See Arancel Externo Comun, MERCOSUR, https://www.mercosur.int/arancel-externo-comun (last visited Jan. 10, 2017). 296 Edições Aduaneiras LTDA, TEC – Tarifa Externa Comum. 3rd ed, São Paulo (1998). See also Decree No. 1.343, 23 of December 1994, D.O.U. de 26/12/1994, www.presrepublica.jusbrasil.com.br/legislacao/112765/Decree-1343-94. 297 INTER-AMERICAN DEV. BANK [IADB] & INST. FOR THE INTEGRATION OF LATIN AM. & CARIBBEAN, MERCOSUR REPORT NO. 1 (1996), https://publications.iadb.org/bitstream/handle/11319/2860/MERCOSUR percent20Report percent20N° percent201.pdf?sequence=1 [hereinafter MERCOSUR REOPRT NO. 1]. 298 Danny Lawpziger et al., MERCOSUR: Integration and Industrial Policy, 20 WORLD ECON. 585, 599 (1997). 299 Previously, the Brazilian and Argentinian auto industries had been coordinated through the “Acordo de Alcance Parcial” in 1980, establishing a list of auto parts that could be exchanged between Brazil and Argentina with fiscal benefits. This list was broadened throughout the 1980s, and, in 1988, both countries signed the Protocol 21 in April of 1988 which would later become the Agreement for Economic Complementation No. 14. This agreement established zero tariffs for auto parts and for assembled vehicles. See COMIN, supra note 262, at 34. 300 See Lawpziger et al., supra note 298. The trade coefficient reflects the proportion of intra-industry trade within a particular segment relative to the total trade volume in that segment. Thus, when the value of exports and imports within the industry are equal, the coefficient is one hundred percent. 301 At that time, Paraguay did not possess a vehicle or an auto parts industry and was not included in these agreements. page 74 between the two countries.302 Second, and with regard to Uruguay, an Agreement for Economic Complementation and its posterior protocols303 was also established to allow for tariff free importation of Uruguayan vehicles respecting a minimum of local content requirements.304
The optimism regarding the regions’ auto industry and the large influx of investments in Brazil and Argentina resulted in a tug of war between both countries to compete for investments in the region. After three years of a trade balance favorably tilting towards Brazil (1990 to 1993), the Argentinean government sought to offset the disequilibrium by increasing the statistical levy that functioned as an actual tariff surcharge from 3 percent to 10 percent. By mid-1993, it introduced measures of selective import protection as a reaction to the impact caused by trade-liberalization. The exchange rate appreciation led to significant losses on key manufacturing sectors.305 From 1994 to 1995, Argentina’s auto industry became stronger and began to revert its exports to Brazil. Foreign investment also started flowing more to Argentina than to Brazil. As a result, more than 25 auto parts industries had moved to Argentina by 1995 while dozens more considered the economic feasibility of doing so.306 In this context, the two countries started a regulatory race to attract investments by decreasing taxes and granting advantages to foreign investors.
Faced with the ACE nº 14 tariff exemptions from Argentina, Brazil also sought to enact a similar industrial policy to offset the potential losses it had experienced as the result of the Argentinean measures. The idea was to concede fiscal benefits that would enable scale production, increase the quality of domestic products, and increase productivity. As a consequence, Brazil would be able to increase its participation in the international market and equilibrate its trade balance. Partly, this is where the New Auto Regime came in as an attempt to prevent auto parts and assembly companies from moving to Argentina.307
302 The “Acordo de Complementação Econômica nº 14 - ACE Brasil / Argentina” was originally converted into law by Decree No. 60, de 15 de of March de 1991, D.O.U. de 18/3/1991 (Braz.), and was posteriorly amended by its forty additional protocols. http://www.desenvolvimento.gov.br/sitio/interna/interna.php?area=5&menu=450&refr=405. 303 Id. 304 COMIN, supra note 262, at 35. 305 GABRIEL CASABURI, TRADE AND INDUSTRIAL POLICIES IN ARGENTINA SINCE THE 1960S, at 18 (1997). 306 Marco Aurélio Bedê, A Indústria Automobilística no Brasil nos Anos 90: Proteção Efetiva, Reestruturação e Política Industrial 141 (1997) (unpublished Ph.D. dissertation, Universidade de São Paulo) (on file with the Universidade de São Paulo). 307 Vigevani & Veiga, supra note 282. page 75
The New Auto Regime generated friction with Argentina and its other MERCOSUR partners. The policies were seen as protectionist and in contrast to interests of Argentine automakers, given they made certain that Argentine assemblers and exporters would lose part of their comparative advantage when trading with Brazil. Argentinean companies alleged a Brazilian breach of the bilateral agreements in the context of MERCOSUR. Uruguay and Paraguay also feared trade diversion and the thinning of trade flows within the bloc. The dispute was temporarily settled with the signing of a new agreement in 1999 in which the auto industry became exempt from harmonization and reduction of external tariffs, as well as from free trade between MERCOSUR countries. Complementarily, Brazil and Argentina mutually recognized each other’s national regimes in the auto industry. The two countries agreed on the development of similar auto industry sectorial policies308 and agreed upon parallel requirements of 60 percent local content for industries in both countries to benefit from tax incentives.309
MERCOSUR played an important role in influencing the logic of sectorial policy making in Brazil. In the process of implementing its own industrial policy for the auto industry, Brazil had to balance the fact that now Argentinean policies directly impacted its market because of the MERCOSUR agreement. Not only that, policies would have to be built to appease and respond to the Argentinean regime Argentinean vehicles were excluded for the from the quota system implemented by the New Auto Regime and offered the same conditions as applied to the Brazilian domestic industry. From that point onwards, a conscious tradeoff between policy space and economic integration was made and incorporated into law by the Brazilian government. Brazil’s attempts to incentivize its auto industry would have to hereinafter include both a national and a regional dimension to appease MERCOSUR partners and to develop an integrated and coordinated regional industry.
b. The New Auto Regime at the WTO
The New Auto Regime was implemented in Brazil almost at the same time that the WTO was established and its agreements entered into force. In many ways, Brazil sought to test the ground for possibilities under the newly established trade regime, as well as to make use of the years before all sunset exception provisions would expire, at the end of 1999. Eventually, however, the Regime collided head-on with many of the restrictions imposed by the WTO.
308 Humphrey & Memedovic, supra note 25. 309 See MERCOSUR REOPRT NO. 1, supra note 297. page 76
This Section outlines two main collision points that exemplify how the Brazilian regime changed in light of Brazil’s WTO membership and how this experience ensured that posterior Brazilian regimes for the auto industries learned from it.
i. Defining ‘critical situation’ in the Balance-of-Payments
As described above in Section 1, by early 1995, the Brazilian domestic market was dominated by imported products. The negative commercial balance led the government to change its liberalizing policy regarding the automotive industry. The government implemented an increased importation tax rate for foreign vehicles that surged from 32 percent in February 1995 to 70 percent in July 1995.310 Although this measure was not an express part of the forthcoming New Auto Regime, it represented a first step towards the reregulation of the Brazilian auto sector.
The impressive hike of the importation tax reverberated across Brazil’s trade partners and came under intense scrutiny in light of the recently concluded Marrakesh Agreement and its corresponding WTO obligations signed on 1st of January 1995. While the tax hike was a clear restriction on market access, Brazil argued that the new rate for the importation tax was not inconsistent with its obligations under the WTO. This was because, under its GATT Article II concessions, Brazil had compromised to fix the import tax for vehicles at 35 percent, valid from 1st of January 1999 and not upon the date of signing of the Marrakesh Agreement. The base tariff was of 105 percent, the official level prior to the Uruguay Round. According to GATT Article II, the reductions of the base tariff would be made effective through five installments, on the 1st of January of every year from 1995 to 1999. The base tariff decreased accordingly to 63 percent, 49 percent and 35 percent in 1997, 1998 and 1999, reaching the compromised rate.311
Soon afterwards, Provisional Measure nº 1.024 of 14th of July 1995 was also employed as another step towards the implementation of the New Auto Regime. It established a restrictive quota of 50 percent less vehicles to be imported into Brazil during the second half of 1995. According to different estimates, that would translate to something between 100,000 to 150,000 vehicles.312 In addition, it also regulated benefits, such as tax reduction, and
310 See Decree No. 1.427, de 29 de March de 1995, D.O.U. de 30/3/1995. 311 Sergio B. Holanda Filho, Nota: O Estabelecimento de um Regime Automotivo Diante da Criação da OMC, 33 ESTUDOS ECONÔMICOS 771, 783–84 (2003). 312 Id. at 784. page 77 conditional local content requirements to be implemented towards the end of the year. This was the first of many Brazilian measures for the auto industry that would come to be questioned at the WTO.
In its notification, the Brazilian Government alleged that Provisional Measure nº 1.024 was necessary to avoid a short-term deterioration of the balance-of-payments and to ensure the equilibrium of the trade balance in the medium and long term, as per the provisions of Paragraph 9 of Article XVIII of the GATT 1994, which states:
“[T]he level of reserves must be adequate for the implementation of the country's economic development program. Considering the risk of deterioration, due regard should be given to special factors that may be affecting the reserves of the contracting party.”313
Based on this provision, Brazil justified this measure as a right of developing countries to adopt import restrictive measures to safeguard their external financial position and ensure a level of reserves adequate for the implementation of their economic development program. It asserted that the restrictions introduced by Provisional Measure nº 1.024 were not in excess of those necessary to offset the negative effects of the import surge – mainly vehicles – on the balance-of-payments. In addition, it argued that, in compliance with Paragraph 10 of Article XVIII, restrictions were designed not to curb the imports of goods essential for the implementation of the economic development.314
Further, Brazil argued that the established quota system was part of an all-embracing economic development program encompassing medium- and long-term policies, including exchange rate policies and measures to control aggregated demand.315 Crucially, the government asserted that Provisional Measure nº 1.024 was vital for the “Real Plan,” the recently implemented currency plan, in its role to counter the inflationary waves the country was undergoing in the 1990s. At that point, the automotive industry was responsible for 11 percent of the Brazil's GDP and directly employed about 700,000 people.316 In the first half of 1995, automobiles imports reached the level of US $ 2.4 billion or 9.2 percent of total imports while in the same period in 1994 that same item represented 3.2 percent of total imports.317 According to Brazil, Provisional Measure nº 1.024 provided for import limits in
313 Committee on Balance-of-Payments Restrictions, Report on the 1995 Consultation with Brazil, WTO Doc. WT/BOP/R/7, at 10–14 (Nov. 24, 1995), https://www.wto.org/gatt_docs/English/HAZPDF/R231.pdf. 314 See Notification Under Paragraph 9, supra note 253. 315 Report on the 1995 Consultation with Brazil, supra note 313. 316 See Notification Under Paragraph 9, supra note 253. 317 Report on the 1995 Consultation with Brazil, supra note 313. page 78
1995 for vehicles with reasonableness, meaning that the exports to Brazil could grow as much as 132 percent when compared to the levels reached in 1994.318 It was seen as a key piece of the “Real Plan” for the resumption of economic growth and for the constitutional reforms aimed at modernizing and liberalizing the Brazilian economy.
Issues around balance of payment emerged as early as 1952 in the GATT system. In that year, a GATT panel was composed to decide on how to interpret "a special contribution" levied by Greece on imports.319 The “special contribution” was a measure imposed by the Greek government to “cover the constantly widening gap between the official exchange rate of the drachma [...] and the effective purchasing power of the drachma.”320 The issue considered in that particular dispute was whether the specific measure should fall under the scope of the GATT or the IMF. Namely, if it was a trade-related balance-of-payments measure or if it was a financial transaction to be covered under the IMF system. Thus, from the very beginning, the domain of what was to be considered a trade-acceptable balance of payment measure began to be defined by experts. According to the forum it was allocated to, the GATT or the IMF, the policy consequences for Greece would change. The domain of what was a trade-related measure would be shaped as well as what would be an acceptable trade policy measure or not.
Though the Panel chose not to reach a decision and to let the Parties consult with IMF, a Special Sub-Group on 1954 specified that “it is impossible to define clearly whether a government measure is financial or trade in character and frequently it is both” also, it found that, in practice, what would define the rule to be applied would be the “technical nature of government measures rather than on the effect of these measures on international trade and finance.”321
In 1981, a Secretariat Background Paper addressing Italian deposit requirements for purchases of foreign currency noted that
“If the distinction between import and payments measures were made by considering the purpose or the effect of the action, the Italian scheme would probably be both a trade and an exchange measure: it is intended to improve Italy's payments position as
318 Id. 319 Panel Report, Complaints: Special Import Taxes Instituted by Greece, GATT Doc. G25-1S/48 (Nov. 3, 1952). 320 Id. 321 GATT ANALYTICAL INDEX (PRE-1995): ARTICLE XV EXCHANGE ARRANGEMENTS 435 (1994), https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art15_gatt47.pdf. page 79
well as to restrain imports, and it has had an impact both on payments for imports and imports themselves. If, however the distinction were made by looking at the restrictive technique used, the Italian deposit scheme would probably have to be regarded as an exchange measure since it is formulated and operated as a requirement to be fulfilled for the purchase of foreign exchange rather than importation.”322
Meanwhile, during the long interval of 1957 to 1997, the Committee of Balance-of-Payments convened periodically to discuss Indian quantitative restrictions on imports of products falling in 2,714 tariff lines in India – Quantitative Restrictions.323 India repeatedly claimed a balance-of-payment justification under Article XVII:B GATT 1994 while the IMF, United States and other countries contested the justification for the measures. Interestingly, the Panel relied on IMF evidence to conclude that India's balance-of-payments situation was not such as to allow the maintenance of measures for balance-of-payments purposes under the terms of Article XVIII:9. 324
The issue of the extent to which the Panel should take into consideration the IMF’s opinion revolved around the interpretation of Article XV:2 GATT 1994:
“The Contracting Parties shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments ... The Contracting Parties in reaching their final decision in cases involving the criteria set forth in paragraph 2 (a) of Article XII or in paragraph 9 of Article XVIII, shall accept the determination of the Fund as to what constitutes a serious decline in the contracting party's monetary reserves.”
Since that dispute, the issue of trade-acceptable balance of payment measures under GATT became partially dependent on the IMF and the IMF’s Boards recommendations. Though not binding on the Panel, IMF’s conclusions were afforded a key role to play in defining the appropriateness of Member’s measures. The dispute makes clear the political role played by expertise in who defines what is a balance of payment crisis and how to regulate it.
While the balance of payment measures described above make it clear how expertise tilted in the system in favor of technical understanding of how to regulate for balance of payment crisis, the Indian example showed who was deemed to have expertise to pass judgment on countries’ balance of payment measures. These illustrative examples were used to show that,
322 Id. 323 Panel Report, India—Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, WTO Doc. WT/DS90/R (Apr. 6, 1999) [hereinafter India Quantitative Restrictions Panel Report]; see also Appellate Body Report, India—Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Product, WTO Doc. WT/DS90/AB/R (Aug. 23, 1999). 324 India Quantitative Restrictions Panel Report, supra note 323, at 3.366–67. page 80 year by year, the issues of what, how and who decides the scope of countries trade-related balance of payment measures.
The Committee on Balance-of-Payments Restrictions consulted with Brazil on the 5th and 9th of October 1995. Until that point, no other Member had sought an Article XVIII:B justification for a measure under the balance-of-payments provisions of the WTO.325 Members had to decide whether the balance-of-payments situation in Brazil was a ‘critical situation’ that warranted the implementation of a measure such as the tax increase brought by Provisional Measure nº 1.024.326 In general, Members feared setting a precedent that would encourage countries to provide justification for their measures even in cases regarding short- term balance-of-payments disequilibrium. The situation of the Brazilian balance-of- payments was put to deliberation among Members as to whether there was proportionality between the seriousness of the situation and the measure put in place.
In large part, Members understood the trade deficit Brazil faced as a consequence of the rapid adjustments in macroeconomic variables brought about by the introduction of the Real Plan, the rising domestic demand, increasing wages and credit expansion.327 For these reasons, Members maintained that the import restriction contained in the Brazilian Provisional Measure could not be justified under Article XVIII (9).
Countries argued it is not always appropriate to consider only the number of months of imports covered by total reserves, but that, in order to make such assessment, the structure of the reserves and the likely movement of its various components was also important. One Member made the case that the US$ 5 billion trade deficit gave the measure economic legitimacy. Overall, Members argued that even if the Brazilian situation did not meet the standard for a “critical situation” in terms of the Understanding, no members' interests would be served if a critical situation developed to unmanageable levels. As such, the “critical situation” element should be read in conjunction with Article XVIII, paragraph 9(a) allowing import measures "to forestall the threat of a serious decline" in monetary reserves. 328 Brazil's
325 Id. 326 Report on the 1995 Consultation with Brazil, supra note 313. 327 Ibid. 328 On the occasion, Members noted that, notwithstanding the provisions in Article XVIII:B, paragraph 9, as reaffirmed in the Preamble to the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes allowing a Member to apply across-the-board measures to alleviate balance-of-payments problems under certain circumstances. See Declaration on Trade Measures Taken for Balance-of-Payments Purposes, Nov. 28, 1979, GATT B.I.S.D. (26th Supp.), preamble (1980). page 81 measures were not imposed to "control the general level of its imports" but to limit selectively the imports in the motor vehicle sector, which accounted for some 9 per cent of total imports.329 Based on this, the Committee did not understand that there was sufficient reason for targeting this sector and requested Brazil to withdraw the import quota. Following the consultation with Brazil, the provisions for an import quota on motor vehicles introduced in June were withdrawn with effect from 27 October.330
ii. Renegotiating the Limits and Scope of the New Auto Regime
Once the measures specified on Provisional Measure nº 1.024 were withdrawn, the Brazilian government approved the substitute Provisional Measure nº 1.235 and Decree nº 1.761 in December 1995. The new regulations, forming the basis for the New Auto Regime, were established to last until 1999 and provided special benefits to assemblers and producers based in Brazil. In a nutshell, the measures provided for a 50 percent discount (totaling 35 percent of importation tax) to the assemblers and producers that joined the program; a minimal local content requirement of 60 percent; lowered import tax for capital goods to 90 percent and the importation tax on input to be reduced to 40 percent by 1999. The regime also established balancing requirements so that the total value of the subsidized imported inputs and vehicles could not outweigh the total value of exportations.
On 30 July 1996, Japan initiated consultations with the Brazilian government regarding some of its auto industry policies introduced by the New Auto Regime.331 Japan alleged that these measures established domestic content requirements as well as requirements for observance of certain proportions between export value and import value for manufactures of motor vehicles, vehicle parts and materials.332 The United States also brought a similar complaint to the WTO regarding the New Auto Regime in 1996. 333 Both countries contested the laws and
329 Report on the 1995 Consultation with Brazil, supra note 313. 330 Committee on Balance-of-Payments Restrictions, Report (1995) of the Committee on Balance-of-Payments Restrictions, WTO Doc. WT/BOP/R/10 (Dec. 4, 1995), https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009- Html.aspx?Id=26342&BoxNumber=3&DocumentPartNumber=1&Language=E&Window=L&PreviewContext =DP&FullTextHash=371857150. 331 For example, there was now a complete exemption from import duties on imports of capital goods. See Comm. on Trade-Related Investment Measures, Minutes of the Meeting Held on 17th March 1997, WTO Doc. G/TRIMS/M/6, at 3 (May 12, 1997). 332 Request for Consultations by Japan, Brazil–Certain Automotive Investment Measures, WTO Doc. WT/DS51/1 (July 30, 1996) [hereinafter Request for Consultations by Japan]. 333 Request for Consultations by the United States, Brazil–Certain Automotive Investment Measures, WTO Doc. WT/DS52/1 (Aug. 9, 1996). page 82 internal regulations334 that established benefits to manufacturers of motor vehicles and parts in Brazil, local content and trade-balancing requirements for manufactures of motor vehicles, vehicle parts and materials.335 Japan and the United States both understood that the Brazilian regime was in violation of GATT articles I:1 and III:4 and in violation of Article 2 of the TRIMS Agreement. Finally, they alleged that the New Auto Regime conditioned benefits for exportation and for the use of local input as opposed to foreign input in breach of articles 3 and 27.4 of the SCM Agreement.
In that context, Brazil and Japan held bilateral consultations on issues arising from the measures contained in the Decrees and the recent changes to these measures in a direction which increased their inconsistency with the TRIMs Agreement. The consultations led to the adoption of Decree nº 1.987 in August 1996, through which the Brazilian government agreed to reform its auto sector regulations. Through this new Decree, Brazil added yet another exception to the program: it allowed for quotas of 50,000 vehicles coming from the European Union, South Korea and Japan to benefit from a tax reduction of 35 percent of the previously established import tax.336 Exactly one year later, in August 1997, the Brazilian government extended this exception by allowing for an extra year of these country quotas, now with an import tax reduction of 50 percent.337 With regard to these countries, bilateral consultations were held and the New Auto Regime was amended in its scope of application as to country quotas and import tax rates.
Soon afterwards, Brazil introduced regional investment measures, tax incentives and other benefits, for automotive investments in the North, Northeast and West-Central Regions of Brazil. 338 Additionally, manufacturers who met targets for local content and export performance were eligible for benefits in the form of import duty reductions. Combined, these Provisional Measures were converted into Laws nº 9.449 and nº 9.440, constituting the New Auto Regime. Brazil notified the Committee on Subsidies and Countervailing Measures
334 Decree No. 1.761, de 26 December de 1995, D.O.U. de 27/12/1995; Provisional Measure No. 1.235, de 14 de December de 1995, D.O.U. de 15/12/1995. 335 Request for Consultations by Japan, supra note 332. 336 See Decree No. 1.987, 20 August 1996, D.O.U. 30/8/1996. 337 See Decree No. 2.307, 20 August 1997, D.O.U. 21/8/1997, www.planalto.gov.br/ccivil_03/Decree/1997/d2307.htm. 338 Provisional Measure No. 1.532, de 18 de January de 1997, de D.O.U. de 17/1/1997, http://www.planalto.gov.br/ccivil_03/MPV/1996-2000/1532-1.htm. page 83 of the Regime and its corresponding measures and asserted that it would be terminated at the end of 1999.
This time round, the European Communities questioned other measures implemented to regulate the Brazilian automotive industry.339 The US followed suit with a new request for consultations on the same grounds in 1997.340 Similarly, the measures contested established benefits conditional on local content requirements and the opening of a tariff quota for the importation of motor vehicles manufactured by certain foreign producers and originating in certain countries. On 10th January 1997, the United States requested formal consultations with Brazil.
The United States, besides resorting to WTO action, also conditioned those proceedings to its own self-initiated investigation under Section 302(b)(1) of the Trade Act of 1974, installed on 11th October 1996. The investigation looked into the large number of Decrees established by the Brazilian government with respect to tariff-reduction benefits contingent on satisfying certain export performance and domestic content requirements since 1995. 341 In August 1996, the USTR sought consultations with Brazil regarding its auto regime. Brazil agreed to enter into talks with the United States to discuss the removal of the discriminatory impact of the Brazilian practices on US exports. According to the perceived success of the talks, the USTR would establish the continuation or the suspension of the WTO dispute settlement procedures (required under Section 303(a) of the Trade Act) for the purpose of ensuring an adequate basis for such consultations.342
These consultations resulted in the signing of a Memorandum of Understanding concerning trade measures in the automotive sector in which Brazil committed not to extend its automotive trade-related measures beyond 31st December 1999 and the United States agreed terminate the investigation under Section 302(b)(1) of the Trade Act of 1974.343 Further, it
339 See Law No. 9.440, 14 March 1997, D.O.U. de 15.3.1997; Decree No. 1.987, 20 August 1996, D.O.U. 30/8/1996; see also Request for Consultations by the European Communities, Brazil–Certain Measures Affecting Trade and Investment in the Automotive Sector, WTO Doc. WT/DS81/1 (May 20 1997). 340 Request for Consultations by the United States, Brazil–Certain Measures Affecting Trade and Investment in the Automotive Sector, WTO Doc. WT/DS65/1 (Jan. 17 1997). 341 As amended in 1979, 1988, and 1994 in the Uruguay Round implementing legislation. See Brazilian Practices Regarding Trade and Investment in the Auto Sector, self-initiated by Acting USTR (Oct. 1996), agreement reached between the United States and Brazil (March 1998) and investigation terminated (March 1998). Docket nº 301-110 342 61 Fed. Reg. 54485 (Oct. 18, 1996), https://www.gpo.gov/fdsys/pkg/FR-1996-10-18/pdf/FR-1996-10-18.pdf 343 MEMORANDUM OF UNDERSTANDING BETWEEN THE GOVERNMENT OF BRAZIL AND THE GOVERNMENT OF THE UNITED STATES CONCERNING TRADE MEASURES IN THE AUTOMOTIVE SECTOR (March 16, 1998), http://www.brazilcouncil.org/wp-content/uploads/2015/11/MOU-on-Automotive-Regime-Mar.-16-1998.pdf. page 84 determined that the bonuses given for imports of new capital equipment incorporated into permanent assets of companies for the purpose of calculating “additional exports” bonuses would be equal to the bonuses given to purchases of domestically produced capital goods as of 1st January 1998. Finally, it modified the ratio of “net exports” to imports contained in the trade balancing requirements in Article 2 of Law nº 9.449.
The controversy was resolved in 1998 in the Trade Practices Settlement putting an end to the WTO investigation.344 Amongst the changes requested were the reduction of the local content requirements, a shorter duration for the auto-regime as well as a longer time frame to allow assembly and auto parts firms to be installed in Brazil in 1998. Similarly, discussions erupted with the United States on the basis of the trade restrictiveness of the program. In 1998, through mediation by assembly companies, the time period for enrollment in the program was shortened from December 1999 to July 1998. In addition, the quantity of vehicles and auto parts that could be imported with a reduced Importation Tax was increased. These changes substantially altered the structure of the New Auto Regime.345
3. Domestic Rules
This Section investigates how countries regulatory autonomy to implement policies can be constrained by their own internal domestic regulatory processes. Domestic constraint was deeply felt in Brazil’s response to the liberalization of the auto market in the early 1990s. When addressing public policy choices and investment attraction regimes, the Brazilian state found itself constrained by its own domestic regulatory system in three main ways. First, it was limited due to the way in which its value added tax prerogatives were constitutionally reformed in 1988 and divided among the federal government, the state governments, and the municipal authorities. Second, the federal state lacked a regulatory framework and institutional mechanisms to hold back the race to the bottom that took place between its states. This race was compounded by the lack of a mechanism to guarantee balanced
344 Press Release, Office of the U.S. Trade Representative, U.S. Trade Representative Charlene Barshefsky Signs Agreement with Brazil on Autos (Mar. 16, 1998). 345 Maria Calandro, A Indústria Automotiva BrasiLawra: Integração Produtiva no Mercosul, Regimes Automotivos e Perspectivas, 28 INDICADORES ECONÔMICOS FEE 116 (2000). Among the measures negotiated, the main ones involved changing the limit date for enrollment in the New Auto Regime from December 31, 1999 to July 30, 1998 as well as the export/import ratio requirement: for each exported dollar, assemblers could import $1,02 in vehicles and auto parts between July 1998 and June 1999. During the last six months, the proportion would become $1/1,03. See Lívia Ferrari, Brasil e EUA Assinam Acordo Automotive, 17 GAZETA MERCANTIL (São Paolo), Mar. 17, 1998 at A-4. See also Governo deve fechar acordo com EUA sobre automóveis, FOLHA DE SÃO PAULO (Jan. 23, 1998), http://www1.folha.uol.com.br/fsp/dinheiro/fi230113.htm. page 85 contracts between federative units and multinationals in order to optimize the amount of foreign investments.346
a. Brazil’s Dual Value Added Tax and Federal Autonomy
One of the most visible limitations to the potential of the New Auto Regime as a nationwide industrial policy derived from Brazil’s very own taxation system prerogatives. Besides the federal tax exemptions and offsets set by Congress, state governments, and municipalities provided further incentives to the regional and local tax exemptions to attract investments during the New Auto Regime. These governments understood that attracting such large investments to their jurisdiction was a straightforward way to increase employment and to stimulate the economy in the short term. The competitive bidding for incentives among states to attract investors led to a detrimental predatory race to the bottom within Brazil, in a phenomenon known as fiscal war.347
With a full-blown fiscal war on its hands, the Brazilian government saw the terms of its New Auto Regime corroded by state and municipal action, slowly deteriorating its industrial policy plan. As such, the original terms of the New Auto Regime suffered de facto changes as state governments and municipalities implemented numerous measures of tax exemptions, tax benefits, easy credit, infrastructure expenditures, government donations, among others, to attract the assembly companies to their jurisdiction. Without attempting to cast judgment on the appropriateness of Brazil’s VAT structure, this Section aims solely to outline how different tax structures, in this case, the VAT tax, can alter a country’s regulatory position, bargaining power and policy space within the international trading regime.
In Brazil, the tax system places states in a privileged position when it comes to regulatory autonomy over value added tax.348 Brazil has been a pioneer in the Value Added Tax (VAT) world:349 it was one of the earliest adopters of any form of VAT in 1967, having been
346 Glauco Arbix, Guerra Fiscal e Competição Intermunicipal Por Novos Investimentos No Setor Automotivo BrasiLawro, 43 DADOS - REVISTA DE CIÊNCIAS SOCIAIS (2000) (Braz.). 347 According to Ricardo Varsano, fiscal war is the “federative conflict where the federate unit (state) that wins—when there is, in fact, a win—it generates losses to one or more of the other federated units (states), given that it is rarely a positive-sum game.” Ricardo Varsano, A Guerra Fiscal do ICMS: Quem Ganha e Quem Perde, 15 PLANEJAMENTO E POLÍTICAS PÚBLICAS 3, (1997). 348 Sergio Prado, Guerra Fiscal e Políticas de Desenvolvimento Estadual no Brasil, 13 ECONOMIA E SOCIEDADE, CAMPINAS 1, 5 (1999) (Braz.). 349 Richard Bird, Decentralizing Value Added Taxes in Federations and Common Markets, 67 BULL. INT’L TAX’N 655, 662 (2013). page 86 preceded solely by France (1954) and Côte d’Ivoire (1960).350 Even so, for a long time, Brazil was the only country to introduce a dual VAT system: on the regional and on the central level.351 The federal VAT taxes are the IPI tax , COFINS (a social security tax) and PIS (profit participation contribution)352 with standard rates of about 20, 7.6 percent and 1.65 percent, respectively. About half the revenue from the three main federal VAT taxes is split more or less equally between the states and municipalities. The regional VAT tax, levied on the circulation of goods and communication and transportation services is the ICMS tax.353 It is established by each state with different rates, exemptions, and incentives.
The Brazilian model of value added tax,354 virtually unchanged since the 1960s, has two features that are crucial to the problem analyzed here. First, in Brazil, the tax competence to levy the most significant of the Brazilian value added taxes, the ICMS tax, lies with the state government. This is different from what is normally seen across the globe, where in most cases the federal government concentrates the powers to levy this type of tax or, at least, has a shared competence in its establishment.355 The shared prerogative, Prado argues, would be
350 Id. 351 For an appraisal of the initial Brazilian proposals, see Michele Guérard, The Brazilian State Value-Added Tax, 20 IMF ECON. REV. 118, 118–69 (1973). 352 Contribution for the Financing of Social Security (COFINS) is a federal contribution tax levied on the gross revenue of businesses that is intended to finance social security. The Program for Social Integration (PIS) is a social contribution tax that is payable by corporations and targeted to finance the payment of unemployment insurance and allowance for low paid workers. COFINS and PIS are hybrid contributions: for some economic activities, they are cumulative at total rate of 3.65% but for other activities they are non-cumulative at total rate of 9.25%. Imports are charged at total rate of 9.25% and exports are exempt. See Law Complementar No. 70, de 30 December de 1991, D.O.U. de 31.12.1991; Law Complementar No. 7, de 7 September de 1970, D.O.U. de 8.9.1970; Decree No. 8.426, de 1 de April de 2015, D.O.U. de 1/4/2015; Decree No. 4.524, de 17 de December de 2002, D.O.U. de 18.12.2002. 353 Tax on the Circulation of Goods and Transportation and Communication Services (ICMS) is a value-added sales and services state tax levied on the sale or physical movement of goods, freight, transportation, communications services and electric energy (including manufacturing, marketing, and imports), and on interstate and inter-municipal transport and communications services. ICMS is non-cumulative, and, thus, tax due may be offset by credits arising from the purchase of raw materials, intermediary products, and packaging materials. It is regulated in the Federal Constitution Article 155, II,1988 and in the Law Complementar No. 87, de 13 de September de1996, D.O.U. de 16/09/1996. See PFK INT’L LTD., supra note 274. 354 The Brazilian value added tax is more complex than in many other countries given that it is composed by four different taxes with different rates and competences. The ICMS is of state competence, the PIS (Programa de Integração Social), the Confins (Contribuição para Seguridade Social) and the IPI are of federal competence. 355 Among large federal countries, Brazil was the first to establish the dual VAT system with such broad tax base. Besides Brazil, only Canada and India also implemented dual VAT systems, though each model has its specific characteristics. See Bird, supra note 349, at 655–56. For a discussion of federal and regional VAT taxes, see Richard BIRD, SUBNATIONAL TAXATION IN LARGE EMERGING COUNTRIES: BRIC PLUS ONE 6 (IMFG Papers on Municipal Fin. & Governance No. 6, 2012); RICARDO VARSANO, A TRIBUTAÇĂO DO COMÉRCIO INTERESTADUAL: ICMS VERSUS ICMS PARTILHADO (Instituto de Pesquisa Economica Aplicado [IPEA], Texto de Discussão No. 382, 1995) (Braz.); Robert F. Van Brederode & Pierre-Pascal Gendron, The Taxation of Cross-Border Interstate Sales in Federal or Common Markets, 2 WORLD J. VAT/GST L., 1; Luis de Mello, The Brazilian “Tax War”: A Case of Value-Added Tax Competition Among the States (Org. for Econ. Co-operation & Dev., Econ. Dep’t Working Paper No. 544, 2007). page 87 instrumental in guaranteeing regulatory influence to the federal government with a tool to harmonize investment policies across its territory. Although this was the case in Brazil until the constitutional reform of 1988, the federal and state government competences for the ICMS tax were changed thereafter. Part of the difficulties stemmed from the 1988 Constitutional Reform that granted the states a much freer hand to introduce changes in the tax-rate structure of their ICMS. According to Werneck, this led to an increasingly “confusing, disharmonic collection of 27 highly complex state-tax codes, forming an unmanageable crazy quilt of VAT arrangements […] that have been as high as 40 percent.”356
The 1988 Constitutional Reform significantly advanced political and fiscal decentralization.357 One of the spheres where the federal government saw a considerable loss of regulatory power was in its autonomy to implement ICMS exemptions and tax breaks independently of the state governments. The 1988 Constitutional Reform also broadened the tax base for the ICMS tax to include communication and transportation services, transforming it into the most ample tax levied on domestic production and consumption (corresponding to approximately 25 percent of the Brazilian tax budget), thus permanently including state governments in the formulation of national tax policies.358 In this context, out of the 35 percent of GDP in 2010 collected in taxes by Brazilian authorities, 25 percent of GDP referred to state taxes and 6 percent to municipal taxes, making Brazil one of the most fiscally decentralized countries in the world.359
The second feature that is key to the problem analyzed here is that the Brazilian tax reform of 1967 opted for the adoption of a mixed principle of origin and destination in interstate commerce ICMS tax.360 Effectively, the mixed principle adopted has one part that is origin
356 ROGÉRIO WERNECK, TAX REFORM IN BRAZIL: AN EVALUATION AT THE CROSSROADS 13 (Pontifical Catholic Univ. of Rio de January, Discussion Paper No. 558, 2008). 357 Varsano argues that regional and municipal tax autonomy were enhanced by the 1988 Constitution due to three main reasons: 1) change of ICMS tax prerogative to the states; 2) extinction of the federal states’ power to grant exemptions of state and municipal taxes; and, 3) the end of conditions and impositions in the transfer of federal collected tax to states and municipalities. See RICARDO VARSANO, A EVOLUÇÃO DO SISTEMA TRIBUTÁRIO BRASILAWRO AO LONGO DO SÉCULO: ANOTAÇÕES E REFLEXÕES PARA FUTURAS REFORMAS RIO DE JANUARY 13 (IPEA, Texto para Discussão No. 405, 1996). 358 Nelson Paes, A Implantação do Princípio do Destino na Cobrança do ICMS e Suas Implicações Dinâmicas Sobre os Estados, 63 REV. BRAS. ECON. 233 (2009). 359 TERESA TER-MINASSIAN, REFORM PRIORITIES FOR SUB-NATIONAL REVENUES IN BRAZIL (Inter-Am. Dev. Bank, Policy Brief No. IDB-PB-157, 2012). 360 On the advantages and disadvantages of the use of the principles of origin and destination in VAT taxation see Michael Keen & Lahiri Sajal, The Comparison Between Destination and Origin Principles Under Imperfect Competition, 45 J. OF INT’L ECON. 323 (1998); Ben Lockwood et al., On the European Union VAT Proposals: The Superiority of Origin over Destination Taxation, 16 FISCAL STUD. 1 (1995); Carlos Longo, Uma Contribuição para a Reforma do ICM: O Caso Dos Ajustamentos de Impostos na Fronteira, 9 PESQUISA E page 88 based and another part that is destination based, varying according to the states involved in the transaction. As such, ICMS tax collection is defined by the part of the production process that is undertaken in each territory and is independent of individual citizen’s tax payments. In this context, state governments are interested in attracting business and investments even if the consumer market is located in a different region or state.
By resolution of the Federal Senate, the North, Northeast, and Center-West states as well as the state of Espírito Santo were granted more beneficial tax rates when compared to the South and Southeastern states. This means that North, Northeast, Center-West states and Espírito Santo held a proportionally larger part of the tax when selling a product to the Southern and Southeastern states. As such, the ICMS breaks and exemptions are essential bargaining tools the state government has with the private sector. Even if the greater part of the product is exported to other federal units, the state where the production is undertaken still retains power to tax local production and to grant tax benefits. This has exacerbated the extent to which different states have granted exemptions and preferential treatments for different sectors, to the point where this interstate competition is referred to as a fiscal war.361
In this context, the choice for a decentralized, dual VATs regime had an implication the central government’s autonomy over the implementation and the running of its trade related tax policies. The example of Brazil and the New Auto Regime illustrates how this specific system of taxation prepares federative units to interact with global players and affect the country’s position and policy space in regulating trade and investment.
b. Brazilian Fiscal Wars
The dual value added tax system described in the Section above explains the limits of the federal government autonomy in restricting state tax manipulation in order to put forth national developmental policies. Nonetheless, other institutional and regulatory factors in the Brazilian domestic context are also important to explain the limited domestic regulatory
PLANEJAMENTO ECONÔMICO 803 (1979) (Braz.); Carlos Longo, Controvérsias Sobre o ICM no Comércio Interestadual: Uma Resenha, 11 PESQUISA E PLANEJAMENTO ECONÔMICO 229 (1981) (Braz.); Ricardo Varsano, Os Ajustamentos de Fronteira do ICM, o Comércio Interestadual e Internacional e a Autonomia Fiscal Dos Estados, 9 PESQUISA E PLANEJAMENTO ECONÔMICO 315 (1979) (Braz.). 361 Another factor exacerbating interstate competition and aggravating the phenomenon of fiscal war is that many states still collect the bulk of the ICMS at the production stage on the basis of estimated tax liability for an average production chain in particular sectors rather than on final retail sales. See Luis de Mello, Brazilian Tax War: A Case of Value-Added Tax Competition Among the States, 36 PUB. FIN. REV. 169 (2008); Aureo de Paula & Jose Scheinkman, Value-Added Taxes, Chain Effects, and Informality, 2 AM. ECON. J.: MACROECONOMICS 195 (2010). page 89 autonomy the federal state enjoyed in implementing the New Auto Regime. At the height of the fiscal war among state governments, the federal state lacked a regulatory framework and institutional mechanisms to administer and to hold back the race to the bottom that took place between its states, as well as a bargaining mechanism to guarantee balanced contracts between its federative units and multinationals in order to optimize the amount and distribution of foreign investments.
The value added tax prerogatives established in 1967, as well as the 1988 Constitutional tax system, gave the ICMS a clear role in regional developmental policies. At that time, rule makers were aware that this enhanced autonomy granted to states had the potential to give rise to state competition through the ICMS tax. Attempting to curtail any harmful development that might have arisen from there, a number of mechanisms were established over the years to regulate and minimize the negative consequences of the adoption of the decentralized taxation of the ICMS.
During Brazil’s military dictatorship, in the early years of this system, the Constitutional Amendment nº 1362 established that the concession of value added tax incentives on behalf of the states would be conditioned to agreements celebrated among states of the federation.363 The strongly centralized federal state guaranteed that, from 1966 to 1969, a considerable number of regional agreements were adopted to harmonize states’ tax policies.364 From 1970 to 1974, approximately 14 agreements were established per year. Only in 1975, 57 agreements were made.
From 1970 onwards, the federal government began to intervene by promoting and coordinating periodic meetings of finance secretaries to avoid harmful competitive taxation. These meetings were formally regulated by Complementary Law nº 24/75 that established that any kind of tax exemption must be the result of consensual decisions by the CONFAZ (Council for Fiscal Policy). 365 The council, constituted by states’ finance secretaries and a
362 See Emenda Constitucional No. 1, de 17 de October de 1969, D.O.U. de 20.10.1969, http://www.planalto.gov.br/ccivil_03/Constituicao/Emendas/Emc_anterior1988/emc01-69.htm. 363 Id. 364 See the regional agreement of Salvador (22/11/66), Fortaleza (22/02/67), Rio de January (27/02/67) and Natal I e II as attempts to harmonize fiscal incentives among states. See also Law No. 5.172, 25 October de 1966, D.O.U. 27.10.1966; Ato Complementar No. 34, de 20 de January de 1967, D.O.U. de 31/1/1967 (relating to the compulsory agreements to establish regional tax rates). 365 Law Complementar No. 24, de 7 January de 1975, D.O.U. de 9.1.1975 (establishing a council for fiscal policy among states (Conselho de Política Fazendária – CONFAZ) and formal requirements for the concession of ICMS tax exemptions). page 90 federal representative,366 attempted to coordinate and discipline the agreements to harmonize the tax rates and policies related to the value added tax in all national territories. Initially, CONFAZ had a direct impact on states' incentive policies. No tax benefit could be granted as an instrument of development policy without the approval of the council, and, when approved, the tax exemption had to be in line with the legal requirements set out by Complementary Law nº 24/75. Throughout the 1980s, CONFAZ started losing its regulatory appeal and capacity to influence states’ decision-making. It was further marginalized with the decentralization reform of 1988.367
Though Complementary Law nº 24/75 contained useful mechanisms to suppress predatory behavior among states, it mostly gave rise to fragmented legal precepts agreed upon by meetings of state’s finance secretaries that gradually lost their capacity to influence regional policy decisions. This legal framework began to falter during the 1980s with the gradual dismantlement of the military regime in Brazil. Towards the end of the decade, states perfected mechanisms to ignore CONFAZ’s recommendations and were already granting benefit concessions that exceeded their fiscal budget.368
A critical moment of state tax competition was inaugurated by the initiative of Paraná governor, Jaime Lerner, in 1996.369 In 1995, Paraná was home to one of nineteen auto assemblers in Brazil, while in 1996, through a series of incentive measures, the state was successful in closing major deals with seven out of the twenty-three new assembly plants that came to the country.370 Paraná did so by elaborating a comprehensive marketing strategy to attract investors, emphasizing the growing productive structure of the state and the unorganized unions and labor force, as opposed to the highly organized labor unions of São Paulo. Further, the government of Paraná approved the “More Jobs Paraná Program” (Programa Paraná Mais Empregos). 371The program established a two-year deadline for the
366 Id. 367 CARLOS EDUARDO CAVALCANTI & SÉRGIO PRADO, ASPECTOS DA GUERRA FISCAL NO BRASIL 86 (1998). 368 RICARDO VARSANO, A EVOLUÇÃO DO SISTEMA TRIBUTÁRIO BRASILAWRO AO LONGO DO SÉCULO: ANOTAÇÕES E REFLEXÕES PARA FUTURAS REFORMAS (IPEA, Texto para Discussão No. 405, 1996) (Braz.); Maria Abadia da Silva Alves, Guerra Fiscal e Finanças Federativas no Brasil: O Caso do Setor Automotivo 7 (Nov. 2001) (unpublished dissertation, Universidade Estadual de Campinas) (on file with Universidade Estadual de Campinas) (Braz.). 369 Decree No. 1511, 29 of December 1995, and Law No. 2736, 5 of December 1996, both drawing on the authorizations set forth in Law No. 9895, 8 of January 1992, D.O.U. of 9 January 1992. 370 Claudinei Silveira & Helena Lisboa, A Atração de Indústrias Multinacionais para o Pólo Automobilístico na Região Metropolitana de Curitiba: A Instalação da Renault, 1 REVISTA GEOGRAFAR 38 (2006) (Braz.). 371 Candida de Fátima Deichmann Santos Lima, O Governo Jaime Lerner e o Programa Paraná Mais Empregos (1995-2002) (Aug. 21, 2012) (unpublished dissertation Universidade Federal do Paraná), http://hdl.handle.net/1884/27514. page 91 payment of ICMS, options for installment payments with no charges and possibilities of extended credit to providers. The final agreement signed with Renault offered the company a loan to be paid back in ten years with no interest or monetary corrections, exemption of all municipal taxes and contributions for ten years, donation of lands by the state and the municipality and purchase by the state of 40 percent of the investment’s shares with no right to vote, among others.372 Overall, it was estimated that the total costs for the state and the municipality were $2,3 billion in financing, tax exemptions, capital investment and others.373
Paraná’s bid with Renault also assumed total responsibility for a part of the direct investment, from the sale of the old National Motor Factory (Fábrica Nacional de Motores) to joint oversight of the vehicles production by Renault. The main assemblers that had expressed desire to establish themselves in Brazil up and until that point such as Chrysler, BMW, Audi/Volkswagen, and Detroit Diesel relocated to Paraná and created the second largest automotive center in Brazil (the first one was established in São Paulo with the ‘first migration of assembly companies’). The fiscal dispute became professionalized from that point onwards with no sign of federal intervention to minimize its negative aspects.
Specialized groups from Rio Grande do Sul, Paraná, Santa Catarina, Rio de Janeiro, Bahia state governments would contact assembly companies to make their bids against each other. The same happened for municipalities’ bids within the state of São Paulo. The culmination of the fiscal war took place when Rio Grande do Sul governor, Antônio Britto, offered General Motors $252 million in cash, subsidies for the acquisition of land, state investments in infrastructure, loans in more than favorable conditions, ICMS exemption and offsets, all of this two years before it would start its production in the state.374
The anticipated incentives granted by the state of Rio Grande do Sul also attracted Ford to the state. The deal became untenable when the state was unable to honor its commitments and had to break the deal with Ford. A change of party governance in the state put in power Olivio Dutra, solidly critical of the Rio Grande do Sul bids, leading to the interruption of the payments and debt renegotiation between Ford and Rio Grande do Sul. The tension between
372 Protocol of the Agreement Renault: State of Paraná, Curitiba, mar 1996. Available at: http://www.senado.gov.br/web/senador/requiao/jogo.htm Accessed 03 December 2015. 373 Silveira & Lisboa, supra note 370, at 45–46. 374 Flávio Fligenspan & Maria Calandro, Novos Investimentos na Indústria Automobilística BrasiLawra: O Caso Gaúcho, 30 INDICADORES ECONÔMICOS FEE 5, 5–30 (2002). page 92
Ford and the state government escalated and Ford eventually broke off the deal and transferred its assembly plant to Bahia in June 1999.
At that stage, Bahia was implementing intense bidding strategies to attract Ford out of Rio Grande do Sul. The “‘cannibalization’ of one state of the federation by the other” 375 characterized the peak of the fiscal war, and the institutional inability or lack of autonomy of the federal government to prevent it. The government of Bahia launched a public campaign criticizing Rio Grande do Sul’s inability to honor their commitments and offering Ford a package deal with municipal, state, and federal resources. The federal resources came into play when the senator from Bahia, Antônio Carlos Magalhães, mobilized the Senate to approve an agreement to include federal tax exemptions in the offer to Ford.376
Thus, in this fiscal war, the New Auto Regime was said to initiate a race to the bottom as states and municipalities competed with each other to attract investments. They redirected spending and invested heavily in industry, transportation infrastructure, donation of land, joint shareholding through the use of state development funds (in the case of Rio de Janeiro with Peugeot), joint shareholding through the privatization of state companies (in the case of Paraná with Renault), credit grants for working capital financed by local development funds, ICMS tax reductions or exemptions, exemption of municipal taxes and charges such as ISS tax377 and IPTU tax378 as well as state bank guarantees, deposit and collateral. 379
The implementation of the New Auto Regime in 1996 by the federal government brought to light the legal and institutional unpreparedness of the Brazilian federal state to deal with the challenges of industrial development. The instruments available to promote and to coordinate industrial development either were weakened over the 1980s or were emptied, as was the case with the Sector Chambers and the CONFAZ. Besides compromising the already fragile
375 Glauco Arbix, Policies of Waste and Desiquilibrium Between the Public and the Private Spheres in the Brazilian Automobile Industry, 17 REVISTA BRASILAWRA DE CIÊNCIAS SOCIAIS 109, 119 (2002). 376 Otávio Dulci, Guerra Fiscal, Desenvolvimento Desigual e Relações Federativas no Brasil, 18 REVISTA DE SOCIOLOGIA E POLÍTICA 95, 95–107 (2002). 377 A services tax (ISS) is imposed on gross revenue generated from companies that render services to many cities. Rates vary substantially between cities. Higher rates are more common in larger cities. Hospitals, schools, colleges, construction, leasing, tourist, and other services pay ISS from two percent to five percent. ISS must be paid on import of services provided by non-residents. See PFK INT’L LTD., supra note 274. 378 Urban Land and Property Tax (IPTU) is a municipal tax assessed on direct or beneficial ownership and possession of urban properties. The IPTU is figured on the assessed value of the real property at a progressive rate to be determined by the value, use and location of the property. See Pinheiro Neto-Advogados, Doing Business in Brazil (2013). 379 Angela Santos & Priscilla Burity, Histórias Setoriais: O Complexo Automotivo, in BANCO NACIONAL DE DESENVOLVIMENTO ECONÔMICO E SOCIAL 50 ANOS: HISTÓRIAS SETORIAIS 101 (2002). page 93 economies of states and municipalities, undermining attempts to establish fiscal balance, the fiscal dispute distorted market competition and led to possible decreases on the size of foreign investment allocated by foreign companies. Such a decrease was then compensated by the elevation of public spending in municipal, state, and federal levels to support the assembly companies in the countries. This process found no restriction by the federal government. The lack of federal mechanisms to counterbalance this public expenditure and to balance determinations of reciprocity in the investments brought by the New Auto Regime illustrate the deficiency of the federal state to implement and uphold industrial policy in the country.
The specific ways in which states are organized directly influence their capacity to bargain, regulate, and interact with private and public actors abroad. In this sense, domestic institutions can be important sources of policy autonomy or policy constraint for their own national state. When looking at the issue of regulatory autonomy of states in international trade, it is, thus, important to understand which domestic factors are constraining the government’s ability to act, how they are regulated, and what is the consequence of such regulation to the state.
In this Section, the relationship between a country’s domestic legal framework and its effect on policy space was of relevance in three main circumstances. First, the case study of how Brazil’s attempt to implement a developmental regime in its territory backfired insofar as its model for shared taxation competences fueled a fiscal war and removed part of control over the concession of incentives from the central government, leaving states and municipalities to fend for themselves in their investment attraction policies. Moreover, there are some useful lessons in the way that this type of tax set up prepares federative units to interact with global players and affect the country’s position and policy space in regulating trade and investment. In making these considerations with regard to the Brazilian model of shared regulatory tax power in Brazil, I do not argue that a decentralized, dual VATs regime is always good or bad in federal countries. What I argue is simply that, if some countries choose to introduce such sub-central VATs for large regional governments, this will have a direct implication for their autonomy over the implementation and the running of its trade related tax policies.
Additionally, the fiscal war among entities of the Brazilian federal state illustrated how the limited legal framework and lack of institutional mechanisms to support Brazil’s value added tax prerogatives put in check some of the main objectives of the New Auto Regime. The page 94 cases of Renault in Paraná and Ford in Rio Grande do Sul and Bahia are emblematic to illustrate the lack of such federal institutional mechanisms and regulations to control a response to the negative consequences of the fiscal war. Not only that, but such wanting domestic framework was counterproductive and even impeded some of New Auto Regime’s objectives of modernization and streamlining the totality of Brazil’s industrial base. Lastly and building on this point, the lack of comprehensive government strategizing for concerted local, regional and national industrial policies debilitated the effectiveness of the Regime. The regional differences, accentuated by the disproportionate benefits given by some states, further concentrated modernization and contributed to increased isolation of less prosperous parts of the countries.
4. Global Value Chains and Corporate Governance
Corporate strategy and the logic of global value chains have great impact on a country’s opportunities to create and implement policies for its domestic industry. This Section presents the challenges faced by the New Auto Regime when faced with the global structure of automotive production chains. It analyses the role played by law in mitigating or enhancing such challenges.
The Section shows the role of law when faced with Sturgeon and Gereffi’s description of the three basic elements of a GVC analysis in the automotive sector.380 Namely, the geography and character of linkages between tasks; how power is distributed and exerted among firms and other actors in the chain; and the role that institutions play in structuring business relationships and industrial location.381 The Section draws on two main conclusions regarding the relationship between GVC structure, corporate governance and regulatory autonomy of states.
First, national governments need to respond to the modern restructuring of the automotive productive chain across jurisdictions with respect to its specific production structure and relationships within the production chain. In large part, the structure of automotive GVC reacts to firm strategy and priorities in their quest to reorganize the relationship between assemblers, first-tier suppliers and contractors within the GVC. As such, corporate
380 Timothy Sturgeon & Gary Gereffi, Measuring Success in the Global Economy: International Trade, Industrial Upgrading, and Business Function Outsourcing in Global Value Chains, 18 TRANSNAT’L CORP. 1, 2 (2009). 381 Id. page 95 governance naturally allocates bargaining power among different actors within a GVC and categorizes activities, services and goods in terms of importance and value. Domestic policies need to respond to this organization within the production chain insofar as it recreates power relationships and distributional outcomes within its territories. Second, the structure of the automotive industry also relates to a state’s regulatory prerogative to limit and organize geographical action within its territory. Automotive production clusters require States to respond to structural requirements of the industry, many a time requiring changes in urban and geographical planning to host and develop the industry.
Understanding the extent to which there is space for a regulatory carve-out and reorientation of actors and entitlements within the working dynamics of GVCs is a first approach to understanding the role of state regulation. Nevertheless, law also plays a crucial role in conciliating the status of relationships between assemblers, first suppliers, and contractors within a global supply chain and organizing it within a country’s developmental goals, thus modifying the very logic of decision making within GVCs.382 By shaping the relationship between different actors in a value chain, local regulation also impacts the distribution of value along different jurisdictions and has the potential to influence the extent to which sourcing decisions made by leading transnational companies define and orient national development. The case study suggests that the New Auto Regime allowed for a previously unheard-of concentration of powers with the assemblers, who were granted the capacity to interfere in the course of government’s fiscal and industrial policies, labor relations, and regional and local developmental policies.
a. Producer Relationships and Distributional Power within GVCs
The auto industry in Brazil was transformed in the 1990s by new investments and liberalization. New investments triggered a strong growth in production and sales in the Brazilian market. Major auto companies abandoned vehicle models specifically developed for the Brazilian market and unified designs to enhance companies’ global competitiveness.383 This change in firm strategy led to a considerable consolidation and restructuring of the Brazilian industry, with extensive follow sourcing with a high degree of penetration of transitional companies into local component industries. Here, two factors are
382 Gary Gereffi, Global Production Systems and Third World Development, in GLOBAL CHANGE, REGIONAL RESPONSE: THE NEW INTERNATIONAL CONTEXT OF DEVELOPMENT 100 (Barbara Stallings ed., 1995). 383 Humphrey, supra note 27, at 130. page 96 of relevance: one, how the organization of the productive structure of global value chains influenced the relationship between different actors within a country (i.e., assemblers, designers, first-tier suppliers, contractors) and, second, how firm strategy operated in a logic that allocated value and bargaining power to different activities and actors within the state.
The first point is illustrated by the struggle of the local components industry when faced with a global industry competitively stocked with companies able to design and provide systems and sub-assemblies across many different markets. Humphrey mentions that this dynamic led to a wave of take-overs, mergers and acquisitions, creating new large companies through the fusion of smaller manufacturers and the development of strategic alliances between major component manufacturers.384 Whereas, in the past, subsidiaries of transnational assemblers developed local supply linkages, the new productive structures created parallel global networks between assemblers and first-tier suppliers.
For instance, Volkswagen decided to adopt a line of modular consortium production in its factory built in November 1996 in Resende, Rio de Janeiro.385 It shared the investment and risk with its eight main suppliers, Maxion, Meritor, Remon, Eisenmann, Delga, VDO/Mannesmann, MWM/Cummins, all of whom were already international Volkswagen partners in other jurisdictions.386 On one hand, the suppliers assumed the operational costs of the plant. On the other, they guaranteed a long and profitable relationship with Volkswagen. In this system of shared attributions and responsibilities, the suppliers were responsible for the assembly line of axles, springs, gearbox, and motors, and Volkswagen assumed liability for the end product and took the lead in quality control, development, certification, and sale. Effectively, direct and indirect employment brought by the investments amounted to less than a third of what was originally expected.387
The consequences of this new productive dynamic were very clear for locally owned companies in Brazil. The sharp tariff reductions in the early 1990s and the New Automotive Regime of 1995 resulted in a large inflow of investment by carmakers and an extensive
384 Id. 385 Glauco Arbix, Política Industrial e o Laissez-Faire na Guerra Fiscal, in BRASIL NO LIMIAR DO SÉCULO XXI: ALTERNATIVAS PARA A CONSTRUÇÃO DE UMA SOCIEDADE SUSTENTÁVEL 243 (Henrique Rattner ed., 2000) (Braz.). 386 Ruy De Quadros & Roberto Marx, Consórcio Modular na VW: Um Novo Modelo de Produção?, FOLHA DE SÃO PAULO (Apr. 14 1995), https://www1.folha.uol.com.br/fsp/1995/10/08/dinheiro/4.html. 387 Id. page 97 denationalization of the local components industry.388 One of the ways lead firms maintain their leadership position in global value chains has to do with the power to streamline their preferences into the production processes throughout the chain. In the automotive GVC, assemblers require standards certification throughout the rest of the supply chain, monitoring the production processes and quality systems of the suppliers. Rarely will an assembler use a firm that does not openly produce according to specific standards, due to monitoring and quality control costs. As such, assemblers hold great power in transferring standards and product regulation across jurisdictions and creating solid, quasi-universal guidelines for worldwide producers.
In Brazil, three of the four largest locally owned component companies in 1995 were sold to transnational component suppliers by the end of 1997, and the remaining company was in serious financial difficulties.389 The case of Freios Varga is emblematic. Freios Varga had led the Brazilian market since the inception of the auto-industry in the country. In the 1970s and 1980s it was exporting to the North American market. In the 1990s, it received many prestigious quality awards from the Big Three North American assemblers, including GM’s Supplier of the Year award. However, at the end of the 1990s and after two previous mergers, it was taken over by its transnational partner, relinquishing any local ownership.390 While most component companies remained somewhat locally owned, transnational companies increased their share of component turnover from 48 percent in 1994 to 59 percent in 1997.391
Concentration at the top of the value chain allows each lead firm to create its own standards and specifications, driving up transaction costs for suppliers and making investment in information technology and production equipment more customer-specific. It also created a top-heavy structure of innovation that leaves little room for smaller firms to improve their prospects by seeking new customers or by developing their own unique products and technologies.392 The absence of a robust set of industry standards even throughout
388 Humphrey, supra note 27, at 123. 389 Stefano Ponte & Peter Gibbon, Quality Standards, Conventions and the Governance of Global Value Chains, 34 ECON. & SOC’Y 1, 1–31 (2005). 390 Humphrey & Memedovic, supra note 25. 391 Ionara Costa, O Setor de Autopeças no Brasil: Desafios e Mudanças na Década de Noventa 94 (June 25, 1998) (unpublished Masters dissertation, Universidade Estadual de Campinas) (on file at Universidade Estadual de Campinas), http://repositorio.unicamp.br/bitstream/REPOSIP/287635/1/Costa_Ionara_M.pdf. 392 Timothy Sturgeon et al., Globalisation of the Automotive Industry: Main Features and Trends, 1 INT’L J. TECH. LEARNING INNOVATION & DEV. 7 (2009). page 98 outsourcing efforts also reflects the strong competition between a tight oligopoly of very powerful lead firms unwilling to work together to develop robust industry-level standards.393
The adoption of international quality standards for vehicle production in Brazil greatly contributed to the industry’s integration with global auto manufacturers. For firms linked into supply chains for the original equipment manufacturing, where the buying enterprise gives all specifications to contracting firms (supplying assemblers and certified replacement parts), quality system certification is essential. Firms are expected to prove compliance with quality management standards showing business efficiency and customer satisfaction. Initially, ISO9000 was sufficient, but increasingly firms are expected to meet the more demanding QS9000 standard or environmental standards, such as ISO14000. The widespread endorsement of such standards has created parallel markets of consultancies and global standards business, led by international consultancy firms such as SGS and BVQI.
ISO quality assurance norms394 were introduced in Brazil by the Brazilian Association of Technical Norms (ABNT) in the early 1990s, coinciding with the first tariff incentives and liberalization policies.395 The diffusion of ISO quality standards was fast: the annual growth rate for accredited ISO 9000 certificates was above 1000 per cent between 1990 and 1998.396 Both government and business associations supported their diffusion though creation of incentive schemes and programs such as the Brazilian Program for Quality and Productivity (PBQP), a critical initiative for raising quality awareness in industry. At the time of the implementation of the New Auto Regime, the possession of an ISO 9001/9002 certificate became a key competitive differential in the Brazilian auto parts supply market. By the 2000,
393 Id. at 22. 394 International Organization for Standardization, (“ISO is an independent, non-governmental international organization with a membership of 164 national standards bodies. Through its members, it brings together experts to share knowledge and develop voluntary, consensus-based, market relevant International Standards that support innovation and provide solutions to global challenges”) About Us, INT’L ORG. FOR STANDARDIZATION, https://www.iso.org/about-us.html (last visited Oct. 10, 2019). 395 The ISO standards were registered at INMETRO (National Institute of Metrics, Normalization and Industrial Quality) as NBR 9000. “ISO 9000 is defined as a set of international standards on quality management and quality assurance developed to help companies effectively document the quality system elements needed to maintain an efficient quality system. They are not specific to any one industry and can be applied to organizations of any size. ISO 9000 can help a company satisfy its customers, meet regulatory requirements, and achieve continual improvement. It should be considered to be a first step or the base level of a quality system.” INT’L ORG. FOR STANDARDIZATION, Quality Management Systems—Fundamentals and Vocabulary, ISO Doc. No. 9000:2015, https://www.iso.org/standard/45481.html (last visited Oct. 16, 2019). 396 Aurélia Adriana de Meló, O Processo de Difusão dos Sistemas da Qualidade ISO 9000: Estudos de Caso em Pequenas e Médias Empresas de Campinas-SP 44 (Dec. 1999) (unpublished Masters dissertation, Universidade Estadual de Campinas) (on file with Universidade Estadual de Campinas), http://repositorio.unicamp.br/bitstream/REPOSIP/286656/1/Melo_AureliaAdrianade_M.pdf. page 99
ISO certification had become an “entry ticket” for both, supplying components to carmakers, and, later on, for becoming eligible for most federal industrial incentives and credit programs.397
The adoption of standards in Brazil led to an additional hurdle of the decreasing reliability of ISO 9000 and QS 9000 certificates issued by Brazilian institutions.398 Growing number of complaints over faulty components produced by accredited institutions put in check the capacity of enforcement and the legal mandate to certify suppliers of national accreditation bodies, such as the ABNT in Brazil.399 The situation became more complex in the case of nationally originated, sector-specific standards, and the generalized mistrust in local institutions.
Behind apparently technical discussions about standard content and monitoring procedures lay issues of access and control. Standards erect new entry barriers in global value chains that may have distributional consequences both in terms of geographic location and of social groups. 400 Gereffi, Humphrey and Sturgeon also suggest that the adoption of standards directly influences the structure of global value chains as it is one of the variables capable of minimizing the complexity of transactions and the widen capabilities in the supply-base. 401 As such, the regulation of standards are central in understanding the way ‘lead’ firms shape the functional division of labor and entry barriers along a value chain.
Besides the concentration of power with carmakers, when standards for codified specifications are widely known, the value chain gains many of the advantages such as greater market accessibility by suppliers, and the re-use of system elements as new products are brought on-stream.402 In light of this, value chain studies suggest that access to developed country markets has become increasingly dependent on participating in global production
397 The ISO certification, however, was superseded in terms of credibility by other nationally originated, sector based standards, like QS 9000 (from the US) and VDA 6.1 (as well as EAQF and AVSQ in Europe) questioning the very concept of a global, generic standard and its potential benefit of reducing transaction costs. 398 Ruy Quadros, Global Quality Standards and Technological Upgrading in the Brazilian Auto-Components Industry, in LOCAL ENTERPRISES IN THE GLOBAL ECONOMY: ISSUES OF GOVERNANCE AND UPGRADING 265, 274 (Hubert Schmitz ed., 2004). 399 Id. at 275. 400 Ponte & Gibbon, supra note 389. 401 Gary Gereffi et al., The Governance of Global Value Chains, 12 REV. INT’L POL. ECON. 78, 103 (2005). 402 Melissa Schilling & Kevin Steensma, The Use of Modular Organizational Forms: An Industry-Level Analysis, 44 ADCAD. MGMT. J. 1149, 1149–68 (2001); Timothy Sturgeon, Modular Production Networks: A New American Model of Industrial Organization, 11 INDUS. & CORP. CHANGE 451, 451–96 (2002). page 100 networks led by firms based in developed countries and following the standards set by them.403
b. The Geographical Organization of GVCs
The automotive industry is not a fully fragmented and global industry. As suppliers took on a larger role in design, they established their own design centers close to those of their major customers to facilitate collaboration, developing strong regional patterns at the operational level.404 Capabilities became bundled within firms and localities, located within a larger integrated spatial economy at the global level. The consequence of this structure was the imposition of geographical constraints and the formation of automotive clusters around specific centers within host countries.
In Brazil, the largest and specialized automotive clusters grew in São Paulo and Paraná, while smaller automotive centers were established in Rio and Minas. In the case of Mercedes Benz, a first industrial zone was constructed inside the factory boundary for firms producing body panels, wheels, and tire assemblies, and seats; and a second industrial cluster on an external zone for companies making wiring harnesses, exhausts, instrument panels, plastic parts, windows, and engine mountings. This set up allowed for synchronized just in time delivery with limited advanced notice of production schedules. Alongside this group of locally sited companies, many other suppliers to Mercedes Benz were also based in São Paulo’s automotive industrial center, the largest center for component production in Brazil.405
In Paraná, the New Auto Regime and the benefits offered by the state of Paraná successfully attracted investments to the region but failed to convert them into a regional development plan. Critiques to the results of these policies refer to the failure to strengthen the productive processes undertaken in the region. Specifically, the hyper-concentrated industry around Greater Curitiba became marked by the lack of economic diversification; investments focused on expanding production (85 percent) as opposed to capacity building, R&D, and technology.406
403 This view is contested. Quadros argues that evidence of adoption of quality standards and certification has not led to closer technical relationships between carmakers and local suppliers in Brazil. See Quadros, supra note 398, at 265. 404 Timothy Sturgeon et al., Value Chains, Networks and Clusters: Reframing the Global Automotive Industry, 8 J. ECON. DEMOGRAPHY 297, 297–321 (2008). 405 Glauco Arbix & Mauro Zilbovicius, O Consórcio Modular da VW: Um Novo Modelo de Produção, in DE JK A FHC: A REINVENÇÃO DOS CARROS, 448, 448–69 (Glauco Arbix & Mauro Zilbovicius eds., 1997). 406 Christian Silva & Moisés Francisco Farah Jr., Economia e Política Industrial Paranaense: Uma Avaliação Crítica da Década de 1990, 6 REVISTA DE DESENVOLVIMENTO ECONÔMICO 17 (2007). page 101
Further, the hyper-concentration of automotive industries in Paraná tilted the inequality scale in the state, concentrating 46 percent of additional value-added investment in the region of Greater Curitiba.407
In this context, the New Auto Regime was limited in its capacity to organize and allocate entitlements within the automotive GVC within Brazil, its regions, and its industrial sector. It failed to coordinate the impacts that the integration to the global industry caused in the regulation of relationships between first-tier suppliers and contractors; or to potential regional imbalances imposed by automotive clusters in urban planning. Brazil’s regulatory policy space was thus limited insofar as any national industry operates as one of the links within a GVC and that it responds to demands from within this productive logic.
The case study of the New Auto Regime shows how the insertion of an industry in a global productive chain changed to reflect firm strategy. As such, the modernization and strategic reorientation of global assemblers directly influenced and defined types of contractual relationships, business agreements, and industry focus in Brazil. The case of Freios Vargas in Brazil illustrates how the insertion of a domestic industry into GVCs reorganized relationships between small manufactures within the country and with major global component manufacturers.
The production logic Brazilian companies faced when being integrated into automotive GVCs caused a significant restructuring of the Brazilian industry. It led to a wave of takeovers, acquisitions, and mergers, both domestically and transnationally. Thus, the logic of corporate governance through global value chains imposed restrictions on the government’s ability to regulate aspects of the industry’s development, such as the realization of all desired production steps in the country, investment in local research and technology, supplier and personnel training, among others.
As the Brazilian automotive industry was inserted in the global automotive production chain, the status of businesses and power relationships within the Brazilian industry also changed. First, it encouraged agglomeration over large regional, national (for contractors), and, eventually, global suppliers of a good (for first-tier suppliers). Second, the supposedly closer relationship between carmakers and first-tier suppliers guaranteed closer oversight,
407 Id. page 102 technological transfer, and supplier training with these companies. Contrarily, contractors with more distant relationships with the carmakers were affected by less advantageous employment conditions such as low training, low technological externalities as well as more intense competitive pressures. In both scenarios, the New Auto Regime could not intervene to lessen some of the pressures felt on the weak end of each bargaining scenario. Quite the opposite, it aggravated the disequilibrium by failing to coordinate policy initiatives within Brazil, by offering no fall back alternative to the local component sector to promote a less dramatic process of commercial opening; and to consciously manage the denationalization surge.
Understanding the extent to which there is space for a regulatory carve-out and reorientation of actors and entitlements within the working dynamics of GVCs is a first approach to understanding the role of state regulation. In light of these considerations, it is safe to say that law plays a constructive role in either accepting or internalizing the status of relationships between assemblers, first suppliers, and contractors – or in reorganizing it within a specific country’s developmental goals, thus modifying the very logic of decision making within GVCs
5. Informal Regulations and Standards
The global automotive industry is subject to competitive pressures that favor processes of harmonization, transnational communication, and regulatory competition with regards to international standards and other types of informal regulation. Car emission and fuel efficiency standards have been examples of product regulations that have spread across the globe through this industry. Due to the need to access different markets and comply with internationally accepted requirements, this industry can push and shape the internal domestic legislation of countries as well as their industrial policy plans. For the purposes of analyzing how these regulations may interfere with domestic regulatory autonomy, I investigate whether any standard or informal regulation directed, shaped, or constrained the implementation of diverging governmental preferences in the case of the Brazilian New Auto Regime (1995 – 1999).
a. Car Emission Standards
Brazil was the first South American country to adopt legislation to curb car emissions, which, from its very inception, was based on standards implemented in the United States and in the page 103
European Union during the 1970s and early 1980s.408 At that point, only Europe, Japan and the United States had developed reliable testing procedures reflecting local real world driving conditions. For the first time regulators were compelled to choose one of three different methodologies as a basis for all posterior national regulations of both car emission standards and fuel efficiency. Each standard’s stringency was strongly influenced by the test procedure used to measure fuel economy or GHG emissions. Ultimately, policy makers across the world in the 1980s were faced with many choices regarding different aspects of these three standards: whether to set a single fleet-average standard or take a tiered approach, with multiple standards disaggregated according to vehicle footprint, weight, class, engine size, or interior size; which test cycle to adopt; and whether the standard should be voluntary or incorporate formal sanctions for noncompliance.409 As a result of these testing discrepancies, vehicles have admittedly different markings under each test, and countries’ choice for a specific standard reflects both closeness of market relationships, additional costs for possible methodology conversion, commercial presence in foreign markets as well as vehicles preferences in each country.410
The notion that Brazil should turn towards more sophisticated economies with advanced technology for the measuring of car emissions was widely accepted. The term ‘California effect’ coins this belief. It describes how jurisdictions which have developed stricter product standards often force foreign producers in other nations either to design products that meet those standards or be denied access to its markets.411 According to perceived market similarities as well as perceived technological accuracy, Brazil incorporated foreign standards from the United States and Europe into its car emission standards legislation. 412 For light
408 Lila Szwarcfiter, Opções para o Aprimoramento do Controle de Emissões de Poluentes Atmosféricos por Veículos Leves no Brasil: Uma Avaliação do Potencial de Programas de Inspeção e Manutenção e de Renovação Acelerada da Frota (Nov. 2004) (unpublished D.Sc. dissertation, Universidade Federal do Rio de January) (on file with the Universidade Federal do Rio de January), http://www.ppe.ufrj.br/images/publica%C3%A7%C3%B5es/doutorado/Lila_Szwarcfiter.pdf. 409 FENG AN ET AL., INT’L COUNCIL ON CLEAN TRANSP., PASSENGER VEHICLE GREENHOUSE GAS AND FUEL ECONOMY STANDARDS: A GLOBAL UPDATE (2007), http://www.theicct.org/sites/default/files/publications/PV_standards_2007.pdf. 410 Id. 411 John Braithwaite, Transnational Regulation of the Pharmaceutical Industry, 525 ANNALS AM. ACAD. POL. & SOC. SCI. 12, 29 (1993); David Vogel, Trading Up and Governing Across: Transnational Governance and Environmental Protection, 4 J. EUR. PUB. POL’Y 556, 562 (1997). 412 The main difference in methodology to assess emissions was in the adopted conduction cycle of the emissions. The three main methods were the European method (New European Driving Cycle – NEDC), the U.S. method (two-phase cycle composed by urban conduction cycle called FTP 75 and an Highway Conduction cycle – Highway) and the Japanese (represents driving in congested city traffic, including idling periods and frequently alternating acceleration and deceleration - JC08). See International Test Cycles for Emissions and Fuel Economy Available at: www.unep.org/transport/gfei/autotool/approaches/information/test_cycles.asp page 104 duty vehicles, Brazil adopted a standard closely based on the US CAFE mandatory standards, based on fuel consumption, measured on miles per gallon, single standard for cars and size- based standards for light trucks 413 based on fuel consumption on a single standard for cars and size-based standards for light trucks. For heavy-duty vehicles, Brazil incorporated the voluntary European standard based on CO2 emissions (in g/km) based on a single standard testing cycle.
The regulation of car emission standards in Brazil had its origins in 1976. During the same year, individual local initiatives took shape across Brazil. Perhaps one of the most consequential of them was São Paulo’s implementation of the standard n.2 in the Ringelmann Scale as the limit of smoke emissions for diesel vehicles and conditioning the sale of vehicles in the state to compliance with these requirements. Soon after this move by the State of São Paulo, the Ringelmann Scale was adopted in all states through CONTRAN Resolution 510/1977. These efforts led to the installation of the first lab in Brazil, installed by Volkswagen in 1978, with the purpose of measuring light vehicles car emissions. In 1981, the Norm NBR 6601, entitled “Analysis of Exhaust Fumes from Light Petrol Vehicles” was created. This norm became the main technical basis for the establishment of vehicle control in Brazil. Regulatory efforts increased in scale during the 1980s. The Federal Government instituted in 1981 a National Policy for the Environment the National System for the Environment (SISNAMA),414 and the National Council for the Environment (CONAMA).415 Subsequently, in 1986, Resolution nº 18/1986 approved the PROCONVE System, Program for the Control of Air Pollution by Motor Vehicles.416
The US model for regulation of car emission standards was the basis for the Brazilian PROCONVE system. In fact, there is little argument that the Brazilian regulatory system for emission controls drew upon the very letter of the Clean Air Act Amendments – CAAA, the Federal Test Procedure (FTP), and Evaporative Emission (SHED) Permeation Testing procedures – throughout their first decades of existence. The limits of emission established by PROCONVE in 1997 were inspired in the American “tier 0” standards of 1987, requiring the
Access: 10 March 2016 See also https://www.globalfueleconomy.org/transport/gfei/autotool/approaches/information/test_cycles.asp#US. 413 Corporate Average Fuel Economy (CAFE) Standards, U.S. DEP’T OF TRANSP., https://www.transportation.gov/mission/sustainability/corporate-average-fuel-economy-cafe-standards (last updated Aug. 27, 2014). 414 Sistema Nacional do Meio Ambiente. 415 Conselho Nacional do Meio Ambiente 416 Programa de Controle da Poluição do Ar por Veículos Automotores page 105 use of electronic fuel injections, three-way catalytic converter technology and oxygen probes to control the oxygen/fuel mix. The first emission standards for light-duty vehicles took effect in 1987, but these standards were lenient and were met by engine modifications alone. In 1992, stricter emission standards were adopted, mimicking those adopted by the United States in 1975. The limits were established for light vehicles, light commercial vehicles and heavy-duty vehicles. For light vehicles, United States’ procedures for measuring fume emissions and fuel evaporation, respectively Federal Test Procedure (FTP) 75 and SHED, were incorporated.
During the 1990s, a new standard was adopted for light vehicles, the “tier 1” car emission standard as per the United States’ Clean Air Act Amendments – CAAA. The “tier 1” regulation was published in 1991 and implemented from 1994 to 1997 until 2003. It established an operating life of 100,000 miles and with average emission standards for a period of 50,000 miles. The United States’ standard emissions testing cycles, as defined by the United States Environmental Protection Agency (US EPA), used dynamometers to provide simulated road loading of either the engine (using an engine dynamometer) or full powertrain (using a chassis dynamometer).417 In 1993, PROCONVE was reinforced with the promulgation of Law nº 8.723/1993418 that confirmed the measures approved by CONAMA and authorized local governments to establish additional measures to further and implement PROCONVE’s requirements. This law set strict emission standards for passenger vehicles for the rest of the decade. Exhaust emissions standards comparable to those adopted by the United States in 1981 were implemented in 1997.
Control of heavy-duty vehicles lagged even further behind that of light vehicles. Limits on smoke emissions that took effect in 1987 for buses and 1989 for trucks. These limits followed the European standards to test and measure gas emissions and have been implemented an average of five years behind Europe. This choice was based on Europe’s tradition in developing diesel motor vehicles that dominated the Brazilian market. In 1994, stricter standards were adopted based on the EU’s Clean Lorry Legislation. These provided for the
417 Tadeu Melo et al., Implantação dos gases orgânicos do tipo não metano (NMOG) no Brasil, INT’L SYMP. AUTOMOTIVE ENGINEERING (2009) (Braz.). 418 See Law No. 8.723, de 28 de October de 1993, D.O.U. de 29.10.1993. page 106 first-stage standards in 80 percent of new buses in 1994 and 80 percent of all new heavy duty vehicles by 1996.419
These methodologies were incorporated by the Brazilian Association for Technical Norms (ABNT) and developed into national standards referred to commonly in legislation over the past forty years. In specific, Norm NBR 6601 for the Analysis of the Gas of Light Petrol Motor Vehicles420 became the main technical basis for motor vehicle emission control in Brazil, serving as a parameter for all posterior regulation in the area. At the time, it was argued that Brazil incorporated the US’ standards as opposed to the European or Japanese due to the larger number of countries that had adopted and vouched for its credibility. Another important factor that influenced Brazil’s choice was the fact that the United States had the most technologically advanced sector for the control of car emissions.421 In this sense, Brazil would count on a powerful ally to induce the use of modern systems of emission control in the fast growing auto industry market.
b. Fuel Efficiency Standards
As with car emission standards, fuel efficiency standard regulation burgeoned in Brazil in the 1980s. At the time, regulators were faced with the same methodological choice encountered during the adoption of car emission standards in the country: the lack of a Brazilian developed methodology for testing motor vehicle efficiency meant that Brazilian regulation would have to incorporate one of the more developed international test cycles for emissions and fuel efficiency: from either United States, Europe or Japan.422 In order to do so, the Brazilian government established a partnership with sector groups for assembly companies and developed a program of fuel efficiency entitled Fuel Efficiency Program (PECO) largely based on the United States testing cycle.423 The PECO program, implemented from 1983 to 1986, was based on the ABNT norm 7024 for “Measuring Fuel Use in Light Motor Vehicles” as well as ABNT norm 6601 entitled “Analysis of Exhaust Fumes from Light Petrol Vehicles” allowing for harmonization of two-step testing methodology of city and highway
419 ASIF FAIZ ET AL., AIR POLLUTION FROM MOTOR VEHICLES: STANDARDS AND TECHNOLOGIES FOR CONTROLLING EMISSIONS 12 (1996). 420 Brazilian Association of Technical Standards (ABNT) NBR 6601:2012 (aligning with Resolução Conama No. 18 de 6 de Maio de 1986, D.O.U. de 17/6/1986 (Braz.)). 421 Szwarcfiter, supra note 408. 422 FENG AN ET AL., supra note 409. 423 Program for Economizing Fuel (Programa de Economia de Combustíveis - PECO) was formalized in 1979 between the BRazilian govenrment, and the car assemblers through ANFAVEA. page 107 conditions.424 These technical regulations adopted the US test cycle as a basis for all standardization and efficiency control in Brazil.
Still during the 1980s, the Brazilian Program for Vehicle Labeling was established (PBE)425 with the purpose of rationalizing the use of fuel consumption. Through this labeling scheme, vehicles were labeled according to rates of energy consumption and awarded a “National Label of Energy Conservation (ENCE)”, following the European classification from letters “A” to “E”, “A” being the most efficient energy consumption and “E”, the less efficient consumption. In 1991, the country launched the National Program for the Rational Use of Oil and Gas (CONPET) to promote the efficient use of nonrenewable energy in all major economic sectors that consume oil derivatives, including transportation. CONPET established labeling mechanisms for control of motor vehicle equipment and other energy consuming devices by and large sharing many characteristics with the European Union’s labeling program.426 CONPET was implemented by PETROBRAS in partnership with the Brazilian National Institute of Metrology, Quality and Technology (INMETRO) since 1984.
The adoption of foreign standards and testing methodologies to implement environmental policies for the auto industry in Brazil was not a contested process. Though resistance to the imposition of such requirements happened in larger markets such as the United States and the European Union, in Brazil there was a lag in the requirements made by the government to the auto industries when compared to those imposed by the United States government to its manufacturers. This made the process of incorporating American testing cycles and limits in domestic regulation a less strict requirement for auto companies operating in the Brazilian market. In fact, for light vehicles requirements for car emissions Brazil lagged a decade in average when compared to the standards imposed by the United States on its manufacturers. A similar lag was also observable for heavy-duty vehicles and the incorporation of European testing cycles and labeling programs into Brazilian regulation. This specific focus on the adoption of foreign standards and testing methodologies did not to seem to conflict or even
page 108 alter the Brazilian government policies for the auto sector and the New Auto Regime. Quite the contrary, these policies were implemented concomitantly and in a coordinated fashion, not influencing the government’s ability to regulate according to its environmental preferences and policies.
6. Case Study Conclusions on Brazil
This Chapter sought to analyze the Brazilian industrial policy intervention in its domestic industry in light of the limits imposed by law in its multiple regulatory processes. In trying to reveal the connections between particular regulatory regimes and policy autonomy, this Chapter examined how transnational legal processes shape the boundaries of state regulatory autonomy. The argument presented here is that the concept of policy space in the trading regime cannot be comprehended solely through the lenses of international trade agreements, be they multilateral agreements at the World Trade Organization, or regional and bilateral agreements. Rather, the concept of policy space represents an entry point to understand how policies and regulations at different levels reflect normative and power struggles taking place in transnational legal processes. This Section showed the delicate and interwoven relationship between Brazil’s New Auto Regime and the transnational legal processes that shape it.
In a timeframe with an overwhelming movement towards liberalization and the removal of inward-looking industrial policies, the case study described here showed the successes and friction points that an inherently developmental auto industry program faced when confronted with liberalization-oriented regulatory influences. It found that, in all four regulatory moments, international, domestic, corporate, and informal legal processes go beyond their original scope of jurisdiction, shaping and reflecting off each other.
International norms, both MERCOSUR and WTO Agreements, had a direct effect on Brazil’s bilateral agreements with its trading partners as well as directly shaping and redesigning the limits of Brazil’s industrial policy through the New Auto Regime. Domestic norms, namely Brazilian tax competency system, and its decentralized planning institutions, effectively limited the government’s control over its prerogative to implement incentives for industrial policy and to respond to demands of transnational corporations and foreign direct investments regimes. Corporate governance through global value chains were also an important limitation of states’ ability to structure the industrial base according to its perceived priorities and preferred productive processes. Both, the relationships among producers and the geographic page 109 distribution of industry became reflective of how actors interact in a GVC at a global level and the step in the production attributed to the specific country industry.
Finally, the global movement in the 1970s and 1980s to incorporate environmental restrictions on polluting vehicles was also a legal influence in the Brazilian automotive policy. Independently of the reasons for compliance, voluntary and market-based, promoted by activists, consumers, investors, organizations, among others, the incorporation of methodological preferences and standards from the United States and Europe happened organically and with no conflicts with the governments’ policy preferences.
These considerations suggest that a more accurate depiction of Brazilian policy space in the aftermath of the establishment of the WTO needs to consider international agreements, domestic regulatory competencies among entities within the federal state, and limitations imposed by corporate governance of global value chains. This realization leads to two important consequences for the study. First, it questions the extent to which international law is the main cause of loss of regulatory autonomy of states. It suggested that the idea of policy space should be understood in a dynamic fashion: as a meeting point of many regulatory influences whose interaction may operate to limit or curb regulatory options available to States. Second, it suggested that the notion of policy space may be a useful tool to map how the interaction of these different policies and regulations relating to a domestic policy, such as the New Auto Regime, reflect normative and power struggles taking place in transnational legal processes.
B. The Case of the United States
The late 1980s witnessed a widespread concern by industry players within the United States regarding the American trade deficit, hitting a record breaking $11.9 billion in 1989.427 By itself, the Japan-US bilateral trade deficit accounted for $49.8 billion, which due to the relative rise of Japan seemed to imply a diminution of American economic eminence in global commerce. When the Clinton administration took office in 1993, the preponderant economic mood was colored by the realities of the late 1980s: severe macroeconomic imbalance associated with loose fiscal policy and tight monetary policy; erosion of international market share, and loss of competitiveness in key manufacturing sectors. The
427 Robert D. Hershey Jr., U.S. Trade Deficit Shrinks to $11.9 Billion, N.Y. TIMES (Feb. 18, 1989), https://www.nytimes.com/1989/02/18/business/us-trade-deficit-shrinks-to-11.9-billion.html. page 110 negative industrial sector outlook pushed industry groups to pressure the government towards results-oriented managed trade policies.
The automotive industry, and, in particular, the Big Three US automakers, Ford, General Motors, and Fiat Chrysler, became more aggressive in their demands. They wished to preserve their insider status as domestic producers and favored policies that prevented auto industry transplants of foreign automakers to sell vehicles in the increasingly integrated North-American market.428 Ford, General Motors and Fiat Chrysler pressured lawmakers to adopt policies that benefited the Big Three at the expense of their Japanese competitors. Working in cooperation with groups of lawmakers, they were instrumental in laying out preferences for tax policies, health care costs, market shared arrangement with Japan with quantitative targets, Corporate Average Fuel Economy (CAFE) and safety standards.429
The pressure yielded results. Congress approved the implementation of state subsidies, such as site improvements, job training grants, and tax holidays; the passing of the 1989 Canada – US Free Trade Agreement; the 1994 NAFTA; the American Auto Labeling Act, implemented in 1994; the 1992 November decision to expel Honda and Volvo from the US Motor Vehicle Manufacturers Association (MVMA); the creation of free trade zone status against Japanese imports among many other incentives.430 On a federal level, the US government mobilized the Domestic International Sales Corporation (DISC) to encourage US companies’ export and created industrial development assistance programs offered by agencies such as the Economic Development Administration, the Small Business Administration, and the Export- Import Bank. These agencies provided a host of grants, loans, and infrastructure support to industry. At the state and local levels, direct grants, bond issues (often exempted tax on interest) and concessionary loans or loan guarantees to auto companies were approved. Additionally, State and local authorities provided land, site assistance, infrastructure support, along with job training.431 Arguably, though the US federal government has historically
428 Lorraine Eden & Maureen Appel Molot, Made in America? The US Auto Industry, 1955-95, at 38 INT’L EXEC. 501 (1996). 429 Auto Industry Backers to Press Administration for Comprehensive Strategy, INSIDE U.S. TRADE (03 March 1995) 430 Robert Reich & John D. Donahue, Lessons from the Chrysler Bailout, 27 CAL. MGMT. REV. 157 (1985). 431 For instance, Volkswagen settled in Pennsylvania in 1978 lured by almost $70 million in incentives, favorable conditions for factory leasing, and $6 million in loans at favorable rates from Pennsylvania's pension funds among other benefits. Likewise, in 1979, in an attempt to save Chrysler from bankruptcy, the U.S. Government passed the Chrysler Loan Guarantee Act in the condition that Chrysler would ‘rationalize’ production in order to return to profitability. In the late 1970s, VW and Honda were the first two auto plants to receive Foreign Trade Zone designation. By 1986, duty free status had been granted to 11GM assembly plants, nine Ford and four Chrysler assembly plans, all transplants and several component plants. page 111 denied the use of an overt or explicit state strategy of industrial policy, these numerous actions effectively agreed on industrial development in the auto sector across the United States.432
This diffuse strategy to protect the US auto industry consisted of independent initiatives articulated between corporate actors and government leaderships through the use of law (or the threat thereof) to push forward automotive related policies during the neoliberal surge in the 1990s. Thus, instead of opting for the outright use of tariffs, the US resorted to the threat of the use tariffs. It abstained from overtly protectionist industry incentives to use domestic regulations, standards, safeguards measures, and remedies procedures in ways that would reach similar results. As such, this version of economic policy came not as economic nationalism or as industrial policy in the Brazilian sense (see Section A), but ultimately took a middle ground between a market-oriented approach and a statist approach to develop the automotive industry, characterized by a deep connection and action between federal and state governments and the auto industry companies.
The case study describes how instead of opting for rigid mechanisms of industrial policy, the United States articulated (i) a combined effort of managed trade policies throughout the 1990s that aimed to reserve market for the US auto industry; (ii) a comprehensive effort to integrate the North American auto industries into a coherent production system for vehicles capable of competing with Asian producers; (iii) an attempt to redefine “domestic” in consumer choices as well as in a new geographical limit and (iv) the use of safety and environmental standards to further limit competition and to protect domestic competitors.
These four concerted policies operated to boost the US auto industry in the 1990s in relation to foreign competition. The Chapter analyzes how these policies were seen under the traditional narrative of international law under the WTO, under regional agreements, transnational corporate governance, and standards and regulation through informal rules. Through this multi-level analysis, the Section describes the extent to which policy space to
432 For an account of federal grants and state policy to the U.S. auto industry in the 1970s and 1980s. By expanding focus for economic development through knowledge creation and dispersion, the U.S. government benefited a broad range of industries as technology and materials development have wide-ranging applications. The proliferation of this emphasis on research and development programs and worker training, while not constituting a coherent industrial strategy, nonetheless indicates a pattern of policy initiatives that reflect overarching concerns and responses. See MAUREEN MOLOT, DRIVING CONTINENTALLY: NATIONAL POLICIES AND THE NORTH AMERICAN AUTO INDUSTRY (1993). page 112 regulate the US automotive industry was experienced by the United States in the attempts to boost the US auto sector in the 1990s.
The case study proceeds as follows. First, the Section looks at how efforts in regional integration under NAFTA led to new local content and rules of origin definition in NAFTA in a way to integrate regional industry and improve its competitiveness with respect to other trade blocks. In broad brushstrokes, national-content requirements were transformed into regional-content requirements, Mexican restrictions on ownership of auto parts and component producers were terminated, and different rules of origin were established. The negotiation and implementation of NAFTA was largely shaped by governmental and industry interests in a constant interplay as to enable the establishment of an advantageous new market for the industry.
The case studies explores how some of these described policies were received in the international trading system by the newly established WTO. Under the preparations for and the implementation of the WTO, these policies were tested as to their consistency under international trading rules. They also demonstrate the extent to which the US government would have the regulatory policy space to put in place measures to assist its auto industry in the context of multilateral liberalization in the 1990s. Despite two favorable rulings regarding the gas-guzzler tax and the luxury tax, an unfavorable GATT Panel decision was circulated regarding the CAFE standards, restricting the use of these standards to benefit the US auto producers. Even so, due to GATT rules, the Panel report was never adopted and the US application of the CAFE standards was never withdrawn The other relevant dispute, regarding the US managed trade policy through Section 301 of the Foreign Trade Act of 1974 was found not to be in breach of WTO law in a controversial panel decision.433 Though the Panel found inconsistencies with WTO law, the United States did not have to withdraw its measures.
Second, looking at the US’ domestic regulatory level, it investigates how US domestic legislation under the United States Trade Act of 1974 enabled the adoption of an aggressive managed trade policy benefitting the domestic auto industry in the face of Asian and
433 See Seung Wha Chang, Taming Unilateralism Under the Multilateral Trading System: Unfinished Job in the WTO Panel Ruling On Us Sections 301-310 Of The Trade Act Of 1974, 31 L. & POL’Y INT’L BUS. 1151, 1151– 226 (1999); An Chen, The Three Big Rounds of US Unilateralism Versus WTO Multilateralism During the Last Decade: A Combined Analysis of the Great 1994 Sovereignty Debate, Section 301 Disputes (1998-2000), and Section 201 Disputes (2002-Present), 17 TEMP. INT’L & COMP. L.J. 409, 409–66 (2003). page 113
European competition. It then explains how the use of domestic law was used to create the North American car market in a concerted effort by the US government and the Big Three automakers. It argues that the specific tools provided for (and created) in US domestic law, though not presented as an overt strategy of industrial policy, effectively implemented similar developmental support.
Third, the Section explores how the corporate strategy and global value chain government operated very differently than in the case of Brazil (Section A). Based in the United States, global lead assemblers operated through the US government to carve policies to open the Japanese and Asian markets and join their productive chains. The close relationship between the Big Three and the US government also worked to create sophisticated mechanisms of decentralized private-public cooperation to promote research and development and promote the industry’s competitiveness.
Last, the Section looks at informal regulations to show how regulations and standards such as the CAFE were instrumental to support the US auto industry in the 1990s. In looking at the role standards play in developing an industrial sector, the Section concludes that regulatory standards can significantly impact the room for regulatory policy space. The CAFE standards were instrumental in creating an artificial incentive for the Big Three US producers to manufacture small fuel-efficient vehicles, to further integrate the national auto industry markets in the region as well as to create a perception of “domestic product” that referred to continentally produced goods after NAFTA.
1. International Rules
a. NAFTA: Creating a Regional Industry
The North American Free Trade Agreement was established amid a wave of new international trading agreements being negotiated and implemented across the globe. Trade blocks such as the Yen Block and the European Community posed an increasing risk to the commercial interests of the US automotive industry.434 These blocks competed with US industries and pushed the United States to rethink its economic competitiveness by moving towards a more integrated regional economic system.435 US policies in the early 1990s, therefore, had the corollary economic objective of providing a counterweight to the growing
434 Symposium, NAFTA: Overview of Legal, Economic, and Practical Issues, 15 LOY. L.A. INT’L & COMP. L.J. 915, 916 (1993). 435 Id. page 114 economic influence of other international trade blocks and minimizing the negative effects they had on the US industry.436
The auto industry was at the heart of the NAFTA project.437 NAFTA was negotiated in a period of economic downturn for the American auto companies and contained important provisions affecting automotive trade. I sought to change the economic landscape of the US auto industry by drawing the economies of the region closer together, and fostering an environment in which industries had to adapt to new competitive positions. The NAFTA negotiations were seen by the US administration as “essential to the US’ long-term ability to compete with Asia and Europe” and crucial to “create a free trade zone stretching from the Arctic to the tropics, the largest in the world – a $6.5 billion market, with 370 million people.”438 The inclusion of Mexico in the already close US-Canadian automobile sector would mean the expansion of the domestic market for consumption of these goods, as well as a cheaper labor force. In a statement regarding the agreement, Bill Clinton, George Bush, and Jimmy Carter jointly defended the proposal as the solution to help US auto sector to be both more efficient and to better compete with rivals in other parts of the world that are consolidating huge trading blocks.439
Following the previous steps towards economic integration marked by the 1965 Canada – US Automotive Products Trade Agreement (Auto Pact) and by the Canada – US Free Trade Agreement (CUFTA) in 1989, the North American Free Trade Agreement sealed the process of regional integration and consolidated the automotive industry in North America as one competitive global player. Though Canada and the US had begun the process of economic integration in the 1960s, the automotive industry in the three countries already shared ownership bonds, similar organization of production, marketing, and distribution systems.440 The same Big Three automotive producers operated in all three NAFTA countries well before
436 Frederick M. Abbott, NAFTA and the Legalization of World Politics: A Case Study, 54 INT’L ORG. 519, 522 (2000). 437 Sidney Weintraub & Christopher Sands, The North American Auto Industry Since NAFTA: Introduction, in THE NORTH AMERICAN AUTO INDUSTRY UNDER NAFTA 1(Sidney Weintraub & Christopher Sands eds., 1998). 438 Remarks by President Clinton, President Bush, President Carter, President Ford, and Vice President Gore in Signing of NAFTA Side Agreements (Sept. 14, 1993) (transcript available at https://clintonwhitehouse6.archives.gov/1993/09/1993-09-14-remarks-by-clinton-and-former-presidents-on- nafta.html) 439Id. 440 Weintraub & Sands, supra note 437, at 3. page 115 negotiations commenced for the 1965 Auto Pact, the 1989 Canada-US Free Trade Agreement (CUFTA), and the 1994 NAFTA.
The CUFTA and NAFTA negotiations further integrated the three markets. Though the US, Mexico, and Canada made legal and institutional adjustments to implement NAFTA, the Mexican adjustment was more profound.441 Mexico had unilaterally structured its automotive industry in a more nationalist fashion, enacting a series of automotive Decrees from 1962 to 1990. The Mexican Decrees divided the domestic market into different segments of vehicles based on size, separating production for domestic sale and exportation. Exports in the auto sector were made in in-bond manufacturing plants, the maquiladoras, typically owned by US firms and employing Mexican labor. NAFTA induced changes in Mexican policy regulations in several areas, such as telecommunications, intellectual property rights, automotive sector, competition, corruption, monetary policy, inward investment, land ownership and others. In particular, legislative changes were made to liberalize the auto sector.442 Mexico agreed to phase out its auto Decrees, which included restrictions on imports and foreign ownership of auto producers, as well as domestic content requirements.443
NAFTA thus created a phased movement towards a single regime. The CUFTA revisions to the Auto Pact were brought into the North American Free Trade Agreement, and the rule of origin that operated for US-Canada trade in the auto sector was changed to count Mexican content as North American and to raise the level of content required for eligibility for NAFTA tariff treatment. The three countries had to make legislative changes to allow for more liberalization in the auto sector, regarding the interpretation, application and administration of the rules of origin.444 Drawing upon the CUFTA, NAFTA’s value content rule and its rules of origin emphasize “substantial transformation” as the general criterion that qualifies a product for designation as originating in North America.445 For passenger vehicles, light and trucks, and their engines and transmissions, NAFTA imposed a requirement of 62.5
441 Legal changes were required in all three member-states as a result of NAFTA. Chapter 19, Annex 1904.15, contains a schedule of changes required to implement the dispute settlement procedures in antidumping and countervailing duty issues. Specifically, in the United States, changes in the dispute settlement procedures in anti-dumping and countervailing duty issues were required; through amendments to Sections 516A and 777 of the Tariff Act of 1930 as well as the CUFTA. 442 Stephen Clarkson, NAFTA and the WTO’s Role in Transforming Mexico’s Economic System, in MEXICO’S POLITICS AND SOCIETY IN TRANSITION 215, 240–42 (Joseph S. Tulchin & Andrew D. Selee eds., 2002). 443 Mary E. Burfisher et al., The Impact of NAFTA on the United States, 15 J. ECON. PERSPECTIVES 125, 131 (2001). 444 Clarkson, supra note 442, at 246. 445 Id. page 116 percent North American content, calculated on a "net cost" basis. For all other vehicles and parts, the threshold was set at 60 percent. Regional value content is the value of content produced or added in Canada, Mexico, or the United States. The threshold was raised to prevent foreign automotive producers (especially Japanese producers) from using Mexico as an export platform to sell in to the United States.
NAFTA also required the gradual phase out of nontariff auto trade barriers. In 1994, Mexico lowered the trade-balancing requirement from $1.75 of exports for every dollar of imports to $0.80 of exports per dollar imported. The requirement was phased down to $0.55 in 2003 and then eliminated in 2004. The national value added requirement dropped from 36 percent in 1994 to 29 percent in 2003 and was eliminated at the start of 2004. The national-content requirement was lowered from 30 to 20 percent both for the auto parts industry and “national suppliers” (maquiladoras qualify as national suppliers if they are not owned by the assembler they supply). Finally, import quotas were eliminated for heavy trucks and buses in 1998, and the surviving import ban on used cars will be eliminated by 2009. Further, the entry into force of NAFTA also abolished ownership restrictions on the enterprises of the auto parts industries for American and Canadian investors and their Mexican subsidiaries by 1999.
b. US – Automobiles: CAFE Standards, Gas Guzzler and Luxury Taxes
Between the approval of the Uruguay Round of Agreements in 1994 and its approval by the US Congress, there was widespread expectation in the US regarding the outcome of the GATT Panel of the CAFE Standards.446 In this dispute, the GATT consistency of three American automobile laws - the automobile luxury tax, the gas-guzzler tax, and the Corporate Average Fuel Economy (CAFE) requirements were seen as unduly protectionist by the European Union.447 Public authorities and environmentalists understood that the result of this dispute was vital to understand how the WTO would come to affect environmental
446 See Report of the Panel, United States – Taxes on Automobiles, WTO Doc. WT/DS31/R (Oct. 11, 1994) (unadopted) [hereinafter Taxes on Automobiles]; see also Corporate Average Fuel Economy law contained in the Energy Policy and Conservation Act (EPCA 1975) (hereinafter called CAFE). Average Fuel Economy Standards, 49 U.S.C. § 32902 (2007); 15 U.S.C. 2001 (repealed 1994); 49 C.F.R. Part 500; S. R. Rep. No. 94- 179 (1975); H.R. REP. No. 94-340 (1975). 447 Charles T. Haag, Legitimizing Environmental Legislation Under the Gatt in Light of the Cafe Panel Report: More Fuel for Protectionists, 57 U. PITT. L. REV. 79, 83 (1995). page 117 standards enacted by the federal and state governments in the US. This decision would be key to influence US Congress votes on the implementing legislation for the Uruguay Round.448
Environmentalists were interested in the dispute because its decision would provide an important interpretation of the Uruguay Round’s “least trade restrictive” rule, which requires countries to develop environmental standards that are not more trade restrictive than necessary. In the cases of the CAFE standard and the gas-guzzler tax, the United States set environmental standards that not only affected foreign nations disproportionately, but that were also open to criticism for being inefficient measures to conserve fuel. If the fate of such legislation was questionable under the old GATT rules, their destiny would be even more uncertain under the rules established by the Uruguay Round.449
The CAFE standards required carmakers to maintain a certain level of fuel economy for their entire fleet of vehicles.450 The standards had to be met by all domestic manufacturers and importers who were considered manufacturers for the purpose of CAFE standards.451As such, dealers importing cars from different countries would have to ensure that their overall fleet of cars sold in the US complied with the CAFE requirements (i.e. 27.5 miles per gallon).452 If an importer or domestic producer failed to comply with such requirement, they would be subject to a penalty proportional to the size of the inconsistency in fuel efficiency measured in miles per gallon. Besides this first provision, the CAFE legislation also contained a “separate foreign fleet accounting” provision.453 This required a manufacturer to meet the 27.5 mpg goal for domestically produced cars separate from the imported cars independent of the overall consumption of the entire fleet sold in the US.
This “separate foreign fleet accounting” provision was heavily supported by the Union of Auto Workers.454 It subjected importers to many penalties that they would not have been charged with were the fleet efficiency calculated by its overall efficiency. The Union of Auto
448 Environmentalists Push Hollings to Investigate Cafe Panel Ruling, INSIDE U.S. TRADE https://0- insidetrade.com.gull.georgetown.edu/inside-us-trade/environmentalists-push-hollings-investigate-cafe-panel- ruling. 449 Public Citizen Moves to Investigate Delay in GATT Cafe Panel, INSIDE U.S. TRADE https://0- insidetrade.com.gull.georgetown.edu/inside-us-trade/public-citizen-moves-investigate-delay-gatt-cafe-panel. 450 Taxes on Automobiles, supra note 446, at para. 5.39–5.41. 451 Id. 452 Id. at para. 5.40. 453 Id. at para. 5.47–5.49 454 Id. at para. 3.288; see Anthony Perl & James A. Dunn Jr., Reframing Automobile Fuel Economy Policy in North America: The Politics of Punctuating a Policy Equilibrium, 27 TRANSPORT REV. 1, 6–8 (2007). page 118
Workers was concerned that the effort to promote increased fuel economy through CAFE would lead the Big Three to import small cars in order to achieve US fuel economy goals. In light of this, Congress added the two-fleet rule, also referred to as the “runaway plant amendment”, in order to prevent “runaway plants” and keep small car production in the United States.455
The US industry had traditionally concentrated on production of larger cars, which were more profitable. Accordingly, Volkswagen and the Japanese manufacturers were supplying demand for small, fuel-efficient models. The effect of the two-fleet rule was to create an incentive for the Big Three to manufacture small cars in the United States, since this was the only way to gain sufficient small car credits to offset domestic production of large, fuel- consuming automobiles.456
The European Union brought a claim under GATT National Treatment Article III:4, alleging that the CAFE standard granted treatment less favorable for like products coming from the EU and sold within the US market. It argued that the separate foreign fleet accounting provision afforded protection to the US production of small, high-mileage automobiles. Absent the CAFE requirements, US manufacturers could import compact and sub-compact vehicles from Europe to fill out their product lines. Because the Big Three had extensive production operations in Europe and manufactured highly competitive small cars there for the European market, this approach would make economic sense. CAFE, however, forced the Big Three to locate small car production in the United States or Canada, so that any CAFE credits generated could be used to offset their North American production of large vehicles. In this way, the separate foreign fleet accounting system discriminated against foreign cars, and the fleet averaging differentiated between imported and domestic cars on the basis of factors relating to control or ownership of producers or importers, rather than on the basis of factors directly related to the products as such. 457
The Panel found that a policy to conserve gasoline, like the CAFE standard, was within the conservation goal of Article XX(g) and that there was a need to restrict the fuel consumption of all cars sold in the United States. It stated that applying the standard to foreign cars “clearly served” a legitimate conservation goal and therefore could be justified under Article
455 Taxes on Automobiles, supra note 446, at para. 3.288. 456 Id. at para. 3.288. 457 Id. at para. 5.49. page 119
XX(g). Nevertheless, the separate foreign fleet accounting provision failed the first part of the Article XX(g) test, requiring members to prove that the measure was made in conjunction with domestic restrictions to achieve the stated policy goal. The Panel deemed that separating automobile fleets by country of origin was not a conservation policy. Because the fleet’s averaging and separate foreign fleet accounting provisions are inextricably linked in the CAFE standard, the Panel held that the entire law was incompatible with the GATT. 458
Additionally, in the same Panel report, the gas-guzzler tax459 was imposed on sales of individual cars that failed to meet certain mpg requirements. The United States imposed a tax on the sale by the manufacturer (including the importer) of each automobile of a model type that has low fuel economy:
i) For model types achieving 22.5 mpg or more, no tax is payable ii) For model types between 22.5 mpg and 12.5 mpg, the tax payable varies from $1,000 to $6,400, based on ten steps. iii) For model types below 12.5 mpg, a tax of $7,700 is payable.460
According to the European Communities, all automobiles were like products, because of their common physical characteristics, components and end-use. A difference in fuel economy was not sufficient to make one automobile unlike another for the purposes of Article III:2. Since most automobiles subject to the tax were of European origin, and very few were of United States origin, treatment under the measure was discriminatory.461 The United States responded that, under Article III:2, a regulatory distinction could legitimately be made between any two products, as long as the distinction was based on objective criteria aimed at a policy other than the protection of domestic production. The distinction drawn in the gas- guzzler law between automobiles above and below the 22.5mpg threshold was justifiable in these terms. The tax was gradual, had reasonable thresholds, and complemented the effects of the CAFE regulations. Further, it asserted that Article III did not protect actual trade flows, but expectations on conditions of competition resulting from government measures.
458 Id. at para. 5.56–5.66. 459 Energy Tax Act of 1978, Pub. L. No. 95-618, § 201, 92 Stat. 3174, 3180-81 (codified as amended at 26 U.S.C. § 4064 (2000)); see also 40 C.F.R. pt 600 (1996) (related regulations). 460 Taxes on Automobiles, supra note 446, at para. 5.17. 461 Id. at para. 5.19. page 120
The Panel found for the United States and held that the regulatory distinctions made in the calculation of the fuel economy of individual models under the gas-guzzler law and regulations not change the conditions of competition that afforded protection to automobile production in the United States. In terms of Article III:2, and for the purpose of the gas guzzler tax, an individual imported automobile whose model type fuel economy was less than 22.5 mpg was not "like" an individual domestic automobile whose model type fuel economy was above 22.5 mpg, even if the fuel economy of the individual domestic automobile was below 22.5 mpg.
Likewise, the Panel also found for the United States with regard to the luxury tax462 imposed on the first retail sale of vehicles over $30,000, and on several other products. The tax was equal to 10 per cent of the amount by which the article's retail price exceeded $30,000 in the case of passenger vehicles and applied to domestic and imported vehicles alike. The Panel considered whether there was evidence, other than sales or trade-flow data, that the threshold had the effect, in terms of conditions of competition, of affording protection to domestic automobiles. It noted that a selling price above $30,000 did not appear from the evidence to be inherent to EC or other foreign automobiles. In particular, no evidence had been advanced that EC or other foreign automobile manufacturers did not, in general, have the design, production, and marketing capabilities to sell automobiles below the $30,000 threshold, or that they did not in general produce such models for other markets.463 In this sense, the Panel deemed that the luxury tax was not implemented so as to afford protection to the domestic production of automobiles and that automobiles above and below that threshold value could not, for the purposes of the luxury tax, be considered as like products under Article III:2.
Despite the two favorable rulings regarding the gas-guzzler tax and the luxury tax, an unfavorable GATT Panel decision was circulated regarding the CAFE standards, on October 11, 1994. As per the rules of the GATT, the United States blocked the adoption of the Panel report and informed that it did not plan to change the CAFE standards mechanism.464 The United States took the position that the European Communities could not show the economic harm required by the GATT in order to prove harm in its commercial
462 Omnibus Budget Reconciliation Act of 1990 27 U.S.C. § 4001 (1990). 463 Taxes on Automobiles, supra note 446, at para. 5.14 464 GATT Rules Against CAFE, Opens Door to Conservation Exception, INSIDE U.S. TRADE (Oct. 4, 1994, at S- 4. page 121 interests or to impose countervailing measures.465 On the basis that no harmful economic effect could be demonstrated, the United States opted not to bring its measures into conformity with the GATT, as required by the Panel report. While the CAFE standard and the gas-guzzler tax do serve the environment, the alleged protectionist bias was preserved in the United States’ regulations.466
c. US – Section 301 of the 1974 Trade Act
The US trade policy strategy to promote its auto industry throughout the 1990s was marked by latent unilateralism enabled by Section 301 of the 1974 Trade Act. Scholars have often coined this phase of US trade policy as a “unilateralism round” in light of concomitant attempts to establish multilateral rounds of negotiations for an international trading regime.467 As Chen proposed, the actual effect of this device left the United States sitting on the fence with an ability to gain advantage from both sides.468 With the establishment of the WTO in 1995, the staunch unilateral actions enabled by Section 301 fell into the attention of the international community. The inclusion of a robust Dispute Settlement System in the WTO was deemed to supersede the need for such measures, at the very least with regard to the disciplines covered by the WTO Agreements. As such, the Uruguay Round was viewed as an attempt to contain the US’ “aggressive unilateralism” manifested in Section 301.469
The international discontent with the US’ use of Section 301 grew with the move towards a multilateral trading order. In 1994, in a reference to the US efforts to open markets for its domestic auto industry, the then Director General of the GATT, Peter Sutherland, warned that the US policy of managed trade was a “misguided and dangerous approach from all points of view.”470 Sutherland understood such approach to trade policy to be damaging to the multilateral trading system for its potential for escalating trade conflicts by agreements outside the system as well as for the incompatibility with parties’ obligations under the
465 Id. (quoting U.S. Trade Representative Mickey Kantor as stating after the CAFE report that the United States “does not intend to make any changes to the CAFE rules”) 466 Haag, supra note 447, at 102–03. Arguably, if the CAFE Panel had released a decision condemning the United States’ laws, environmentalists and other supporters of the laws may have prevented congressional adoption of the new Uruguay Round agreement, adding a different systemic meaning to the critics of the Panel report and to the US block of its adoption. 467 Chen, supra note 433. 468 Id. 469 Robert E. Hudec, Thinking About the New Section 301: Beyond Good and Evil, in AGGRESSIVE UNILATERALISM: AMERICA’S 301 TRADE POLICY AND THE WORLD TRADING SYSTEM 113, (Jagdish N. Bhagwati & Hugh T. Patrick eds., 1990). 470 Sutherland Warns Against Managed Trade Approaches, SUNS ONLINE (Mar. 3 1994), www.sunsonline.org/trade/process/towards/03030194.htm. page 122 system. He argued that if the US sought quantitative numerical targets for market share of foreign producers in a domestic market, it would not give all countries equal opportunity required by the MFN principle.471
The US negotiations to boost its auto industry are example of this. The United States disregarded the multilateral dispute settlement mechanism of the WTO, to rely directly on Section 301 and to unilaterally declare, on May 16, 1995, that it would levy 100 percent ad valorem duties on sixteen different types of imported Japanese luxury-model automobiles.472 This rate of duty by far surpassed the binding tariff of 2.5 percent that the United States committed to on the tariff concession schedule. Additionally, the United States withheld the liquidation of customs entries with respect to the automobiles, causing a confinement of goods.
Faced with US unilateral retaliation, the Japanese government filed a request for consultations with the WTO’s Dispute Settlement Body (DSB) on May 22, 1995, claiming that the measures taken by the United States discriminated against Japanese commodities and were in breach of Articles I and II of the GATT as well as Article 23 of the Dispute Settlement Understanding (DSU).473 The context was such that Japan faced US retaliatory action under Section 301 if an agreement was not reached, while the US faced a WTO dispute in the event of retaliation. After two rounds of negotiations, the matter was finally settled through political means conducted independently from the Dispute Settlement process. The United States and Japan reached an understanding on June 28, 1995 whereby the Japanese government opened its market for automobile and automobile parts and promised to adopt specific measures to implement the US proposals.474
The US government, as a compromise, phased out its decision to levy a 100 percent duty on automobiles imported from Japan, withholding the liquidation of customs. Ultimately, the threat of retaliatory action under Section 301 pushed the Japanese government to settle the ordeal. In connection with this episode, the Japanese government stated: “this incidence was
471 Id. 472William E. Scanlan, A Test Case for the New World Trade Organization’s Dispute Settlement Understanding: The Japan-United States Auto Parts Dispute, 45 KAN. L. REV. 591, 605 (1997); Statement by Ambassador Michael Kantor, Office of the U.S. Trade Representative, Exec. Office of the President (May 16, 1995). 473 Communication by Japan, United States—Imposition of Import Duties on Automobiles from Japan under Sections 301 and 304 of the Trade Act of 1974, WTO Doc. WT/DS6/1 (May 22, 1995). 474 US-Japan Automotive Agreement, Aug. 23, 1995, reprinted in 34 I.L.M. 1482 (1995); USTR Fact Sheet on US-Japan Auto and Auto Parts Agreement Released Jun. 28,1995,12 INT'L TRADE REP. (BNA) 1163, 1163–64 (July 5, 1995) page 123 a clear example that the United States acted in violation of its obligations under the DSU in favor of the procedures under the Trade Act of 1974.”475
Three years later, the matter of Section 301 was still controversial among WTO members. After successive rounds of Section 301 unilateralism threats, the issue was once more brought to the WTO’s DSB in 1998. This time around, the European Union argued that Section 304 violated the US’ WTO obligations by requiring the USTR to determine whether another WTO Member “denies US rights or benefits” under the WTO agreement before DSU procedures have been exhausted. At the heart of this dispute was the mandatory vs. discretionary discussion.476 The controversy was that Section 304 allowed national authorities to act either consistently or inconsistently with their WTO obligations. The text of the law did not, per se, require a violation of WTO norms, but allowed for one. It did not mandate a violation, but it gave the USTR discretion to violate. The US argued that only legislation which mandates WTO inconsistent action could be deemed to violate WTO provisions. The Panel disagreed and concluded that, by reserving the right to impose unilateral measures even in cases where the DSU proceedings had not been exhausted, Section 304 was in violation of Article 23 of the DSU. According to the Panel, “the very discretion under Section 304 is what, in our eyes, creates the presumptive violation.”477 The Panel went on to say that
“Members faced with a threat of unilateral action, especially when it emanates from an economically powerful Member, may in effect be forced to give in to the demands imposed by the Member exerting the threat, even before DSU procedures have been activated. To put it differently, merely carrying a big stick is, in many cases, as effective a means to having one’s way as actually using the stick. The threat alone of conduct prohibited by the WTO would enable the Member concerned to exert undue leverage on other Members.”478
In the occasion, the USTR published a Statement of Administrative Action (SAA) agreeing to curtail its discretion to impose retaliatory measures. The Statement of Administrative action,
475 Panel Report, United States – Sections 301-310 of the Trade Act Of 1974, WTO Doc. WT/DS152/R, at 5.273 (Dec. 22, 1999) [Hereinafter U.S. Sections 301-310] . 476 Sharif Bhuiyan, Mandatory and Discretionary Legislation: The Continued Relevance of the Distinction Under the WTO, 5 J. INT’L ECON. L. 571, 571–604 (2002); Haneul Jung & Jeongmeen Suh, Preventing Systematic Circumvention of the SCM Agreement: Beyond the Mandatory/Discretionary Distinction, 15 WORLD TRADE REV. 475, 475–93 (2016); Nicolas Lockhart & Elizabeth Sheargold, In Search of Relevant Discretion: The Role of the Mandatory/Discretionary Distinction in WTO Law, 13 J. INT’L ECON. L. 379, 379–421 (2010); Yoshiko Naiki, The Mandatory Discretionary Doctrine in WTO Law: The US–Section 301 Case and Its Aftermath, 7 J. INT’L ECON. L. (2004). 477 U.S. Sections 301-310, supra note 475, at para. 7.58. 478 Id. at para. 7.86. page 124 as well as the US’ statements during the proceedings, convinced the Panel that the US had committed itself to act, in each and every case, in conformity with WTO dispute settlement procedures. However, the Panel made the caveat that if the undertakings made in the SAA and before it were ever removed, this finding of conformity would no longer be warranted.479 With the final Panel Report circulated among Members on December 22, 1999, both parties were deemed satisfied. The EU Trade Commissioner, Pascal Lamy, stated that “the Panel had clarified that the Section 301 of the Trade Act of 1974 could stay in the books only with the United States’ commitment that it will only be implemented in accordance with WTO rules.480 The decision, deemed more political than legal,481 ensured that the United States would not have to reform its norms and would be able to keep the measures at issue stored for the future.
2. Domestic Rules
The United States’ used of several domestic instruments in the early 1990s to achieve its domestic policy goals. This Section explains how the US used its leverage power under its Trade Act of 1974 to manage its trade policy in the 1980s and 1990s. First, by alternating international negotiations with the threat of retaliation, the US was able to open markets across the globe and shape newly created international norms to reflect its preferences. Alternated negotiation with intimidation to achieve US trade policy goals. Second, by redefining the notion of domestic production, the Big Three were able to maintain their insider status as domestic producers to benefit from the conditions applying to domestically produced cars and imports. Third, the Section explains the efforts of the domestic automakers to control the participants and the firms that would participate in the US Motor Vehicle Manufacturers Association to ensure a united political interest in detriment of foreign companies. Fourth, the Section presents a last instance of creative lobbying by the Big Three leading to the approval of the American Automobile Labelling Act as a significant piece of domestic regulation to further insulate them from international competition within the US market. These initiatives illustrate how the US government and the industry leaders designed measures to protect the domestic industry in a way other than an overt industrial policy.
479 Id. 480 European Commission of Trade, WTO Report on US Section 301 Law: A Good Result for the EU and the Multilateral System (Dec. 23, 1999), trade.ec.europa.eu/doclib/docs/2003/november/tradoc_114823.pdf. 481 Chang, supra note 433. page 125
a. US Managed Trade Policy
The United States Trade Act of 1974,482 famously referred to for its Sections 301-310 discussed above, is the main statutory authority for the United States government to address allegedly unfair trade practices from foreign governments. In 1988, it was revised as the “Super 301”, as part of the Omnibus Trade and Competitiveness Act, a statute widely used to combat unfair trade practices by the US’ trading partners. The “Super 301” became one of the key levers in US trade policy, giving the USTR autonomy to determine when countries were acting “unreasonably” or “unjustifiably”.483 The move towards a revamped Section 301 and more protectionist executive actions at the beginning of the 1990s was encouraged by the domestic industry and organized labor forces within the US.484
As explained in Section 1.c, the provisions in Section 301 include both mandatory and discretionary components. Mandatory action requires violation of a trade agreement, but the discretionary component does not. Rather, it allows the US government to act if a foreign government practice is deemed to be “unreasonable” or “unjustifiable” and burdens US commerce. The Act establishes several detailed stages and time frames for investigations to be followed by the USTR before a unilateral retaliatory action, or the threat thereof, can be authorized.
Further, the Act only requires that the US resort to dispute resolution under trade agreements if the issue is covered by a trade agreement ratified by the US. Abbott explains that the Act authorized the USTR to use any means available to it to establish a trade regime to reflect its domestic structures and to open foreign markets by imposing on foreign countries what it considers to be fair trade. Importantly, the Act was seen as a parallel to the adoption of trade agreements and trade expansion, a tool enabling the US to achieve its trade policy goals.485
482 See Trade Act of 1974, §§ 301-310, 19 U.S.C. §§ 2411-31 (1994 & Supp. IV 1998). 483 Chapter 1 - Foreign Import Restriction and Export Subsidies a) Whenever the President determines that a foreign country or instrumentality (1) Maintains unjustifiable or unreasonable tariff or other import restrictions which impair the value of trade commitments made to the United States or which burden, restrict, or discriminate against United States commerce (2) Engages in discriminatory or other acts or policies which are unjustifiable or unreasonable and which burden or restrict United States commerce. See 19 U.S.C. §§ 2411-31. 484 Hudec, supra note 469, at 172. 485 CANDIDO TOMAS GARCIA MOLYNEUX, DOMESTIC STRUCTURES AND INTERNATIONAL TRADE: THE UNFAIR TRADE INSTRUMENTS OF THE UNITED STATES AND THE EUROPEAN UNION 132 (2001). page 126
The Reagan, Bush and Clinton administrations sought to combat the US trade deficit from the late 1980s to the mid-1990s with aggressive measures to open foreign markets.486 Besides the efforts invested in the lengthy Uruguay Round of Negotiations, the credible threat of the use of US sanctions under Section 301 also provided significant leverage for opening markets on a unilateral basis.487 By authorizing the imposition or increase in tariffs and the implementation of quantitative restrictions, Section 301 provided the legal basis for enforcing a trade agreement, principally the GATT.488 Bello and Helmer argue that US actions under Section 301 not only opened markets around the world on a most-favored-nation basis, benefitting producers and exporters in the United States as well as elsewhere, but also benefitted the consumers in the country whose market was opened. In this sense, the statute was also seen as a “significant club,” looming in the background and improving the US’s leverage at the international negotiating table.489 Arguably, Section 301 did more to open markets in the period from 1985 to 1992 than any other international governmental activity,
486 Interestingly, in 1980, the United Auto Workers (UAW) and the Ford Motor Company filed petitions with the United States International Trade Commission seeking temporary import relief under Section 201 of the Trade Act of 1974. In that occasion, the International Trade Commission had ruled that automotive imports were not the most important cause of serious injury to the U.S. auto industry, suggesting that the U.S. domestic policies and practices in the industry itself needed to be addressed. Its decision indicated that other economic factors, including the economic recession and a shift in consumer demand toward smaller cars were the primary cause of such injury. Despite the ITC’s positioning, Congress members remained convinced that though some U.S. industries had lost their competitive edge for issues that were largely domestic, their chances to sell would be improved if new foreign markets became open to them. In this context, attempting to manage Congress’ protectionist intent while acting without express executive support from the ITC, President Reagan sought further liberalization abroad in the belief that it would benefit the local auto industry. See U.S. INT’L TRADE COMM., CERTAIN MOTOR VEHICLES AND CERTAIN CHASSIS AND BODIES THEREOF, REPORT TO THE PRESIDENT A-4 (USITC Pub. No. 11110, 1980); see also Paula Stern, Commentary, in AGGRESSIVE UNILATERALISM: AMERICA’S 301 TRADE POLICY AND THE WORLD TRADING SYSTEM 191, 196 (Jagdish N. Bhagwati & Hugh T. Patrick eds., 1990). 487 A well-known example of this is the Voluntary Export Restraint quotas for the auto industry between Japan and the United States that was negotiated in 1981 and ultimately remained in place until 1994. The Voluntary Export Restraint (VER) program, though presented as unilateral act on the part of the Japanese government, was the apparent result of a Japanese-American agreement during the Reagan administration. By imposing quantitative restrictions of 1.68 million Japanese cars into the United States each year, it sought to alleviate the economic downturn in the US auto industry whose domestic sales were at the lowest point in 19 years and struggled with pervasive unemployment. See e.g., Issues Relating to the Domestic Auto Industry: Hearings Before the Subcomm. of Int’l Trade of the S. Fin. Comm., 97th Cong. (1981); see also Office of Tech. Assessment, US INDUSTRIAL COMPETITIVENESS: A COMPARISON OF STEEL ELECTRONICS, AND AUTOMOBILES (1981); William A. Henry III., Hard Times in the Heartland, TIME (Dec. 7, 1981), http://content.time.com/time/magazine/article/0,9171,953227,00.html. 488 Judith H. Bello & Alan F. Holmer, US Trade Law and Policy Series No. 24: Dispute Resolution in the New World Trade Organization: Concerns and Net Benefits, 28 INT’L LAW. 1095, 1099–100 (1994). Bello and Holmer list, for example, that President Reagan alone imposed a 15 percent tax on imports of softwood lumber products from Canada; increased duties in 1986 on an estimated $24 million of Japanese products and in 1987 increased duties to 100 percent on $300 million worth of Japanese products in response to Japan's breach of the 1986 semiconductor agreement. Id. at 1101. 489 Joel Kurtzman, Prospects; A Trade Law With Teeth, N.Y. TIMES (May 21, 1989), https://www.nytimes.com/1989/05/21/business/prospects-a-trade-law-with-teeth.html. page 127 including the Uruguay Round negotiations.490 In addition, the use of Section 301 also enabled the United States to achieve better rules in the Uruguay Round in general, concerning dispute settlement and intellectual property protection in particular.491
While during the first decade of use of Section 301, from 1974 to 1984, the Act was occasionally used to enforce perceived US rights under the GATT, in the second decade, from 1984 to 1994, it was also used to tackle foreign barriers not regulated by the GATT. The “unjustifiable” and “unreasonable” standard492 to judge a foreign measure was used as a mean for the US to pursue an international trade system that reflected its own understandings of “reasonable” and “just,” according to its internal balance and domestic structures. As such, Section 301 was used to establish an international regime on goods, services, intellectual property rights and telecommunications consistent with the United States’ market consideration standards.493
It is this mechanism that was coined “managed trade approach” in the context of US trade policy in the 1980s and 1990s. It alternated negotiation with intimidation to achieve US trade policy goals.494 This new style of talks specifically aimed at opening up sectors seen as closed to competition, including the famous encounters with Japan through the Market- Oriented, Sector-Specific (MOSS) talks, the Structural Impediments Initiative (SII) and the US–Japan Framework for a New Economic Partnership. Sectorial access talks were supported by the government’s new strategy of aggressive use of Section 301 and included the manufacturing sector extending to the range of trade barriers to private business and consumer practices. As it had been the case in 1980s, successive US administrations in the 1990s chose to view the US auto industry crisis not as a result of domestic macroeconomic management, but as the consequence unfair trading practices abroad. It argued that, specifically, from 1986 to 1994, the auto sector accounted for more than half of the US deficit with Japan.495 As such, the US recycled the view that reducing the auto industry deficit with
490 Bello & Holmer, supra note 488, at 1102. 491 Id. 492 Patricia I. Hansen, Defining Unreasonableness in International Trade: Section 301 of the Trade Act of 1974, 96 Yale L.J. 1122 (1987). 493 Molyneux, supra note 485, at 132. 494 Keith Bradsher, For Clinton, ‘Managed Trade’ Is Emerging as Policy Option Published, N.Y. TIMES (Mar. 30, 1993), https:// www.nytimes.com/1993/03/30/business/for-clinton-managed-trade-is-emerging-as-policy- option.html. 495 See Masao Satake, Trade Conflicts Between Japan and the United States over Market Access: The Case of Automobiles and Automotive Parts 14 ASIA PACIFIC ECON. PAPERS 310 (2000), https://ideas.repec.org/p/csg/ajrcau/310.html. page 128
Japan would improve the country’s overall trade deficit and would revamp the auto sector, with positive reverberations to the rest of the economy.496 The approach, still commonly used to justify protection of domestic industries, provided the government with domestic political support to use the threat of retaliation abroad as a mechanism to fix the lack of competitiveness of the domestic industry.
Throughout the 1990s, bilateral talks sought to address concerns of the US domestic auto industry. In May 1991, the US Vice-President visited Japan and requested that Japanese automakers sell US cars through their own distribution channels. In July of that year, Japan agreed to set up a purchasing plan for foreign-made auto parts, the so-called “voluntary plan,” together with conducting a fact-finding investigation on its standards and certification system. The five Japanese auto manufacturers announced that they would increase purchases of foreign-made auto parts by up to US$1.635 billion in 1994, exceeding the 1990 figure by 90 percent. More than 80 percent of these purchases would be accounted for in purchases by the transplants in the United States.497
The managed-trade approach continued throughout the Bush administration with constant joint trade ventures between the executive and the auto industry. In 1991 and 1992, US automakers went to Japan to discuss extra purchases of US auto parts, passenger cars as well as Japanese non-tariff barriers to the trade of these goods.498 In 1992, the Japanese agreed to increase purchases of auto parts by up to US$19 billion and make greater efforts to buy more foreign automobiles and to revise some of the non-tariff barriers.499 Additionally, the US government attributed the low import penetration of American cars in the Japanese market to structural barriers to the domestic distribution system. The US wanted to dismantle the control Japanese automakers had “over their dealers through financial ties (equity, loans, rebates, transfers of personnel to dealerships) as well as through practices found in the
496 This view was rejected by the 1983 Economic Report of the President, which stated that “[l]arge trade deficits are not the result of unfair trade competition. Large projected US deficits are result of macroeconomic forces, particularly large budget deficits. The main sources of the US trade deficit are not to be found in Paris or Tokyo but in Washington.” COUNCIL OF ECON. ADVISERS, ECONOMIC REPORT OF THE PRESIDENT TOGETHER WITH THE ANNUAL REPORT OF THE COUNCIL OF ECONOMIC ADVISERS 67 (1983). 497 Satake, supra note 495, at 9–11. 498 David E. Sanger, Bush in Japan; A Trade Mission Ends in Tension As the ‘Big Eight’ of Autos Meet, N.Y. TIMES (Jan. 10, 1992), https://www.nytimes.com/1992/01/10/us/bush-in-japan-a-trade-mission-ends-in-tension- as-the-big-eight-of-autos-meet.html. 499 Satake, supra note 495, at 19. page 129 automobile industry, such as allocation of the most desirable models, and other forms of cooperation and technical support.”500
Ultimately, the United States saw Japanese dealers as structural barriers to the distribution system surplus sales which prevented foreign vehicle manufacturers from obtaining economies of scale on certification and homologation costs, driving up the unit cost of imports.”501 The US made a series of structural requests to the Japanese. Among them, a stricter enforcement of anti-trust laws; financial assistance to aid efforts by foreign manufacturers to develop and market appropriate models; requests for Japan to commit to the future number of car dealers selling foreign cars, and the request that Japanese car manufacturers should influence their dealers to begin handling ‘Big Three’ models.502
These requests attempted to change Japanese market structures and Japanese governance preferences that the US found to be anti-competitive and against its understandings of how markets should operate. Importantly, they aimed to reframe the social-economic structures that characterized the Japanese market at the time, specifically, the keiretsu enterprise structures.503 The traditional keiretsu system was an arrangement in which buyers formed close associations with suppliers, merging business relationships and shareholdings. This form of corporate structure insulated companies from stock market fluctuations and takeover attempts, thus enabling long-term planning in innovative projects. Keiretsus were characteristic of the manufacturing industry in Japan and had maintained dominance over the Japanese economy for the second half of the 20th century.
Between 1993 and 1995, during President Bill Clinton's first term, tensions escalated not only in Japan but also with regards to other growing Asian producers such as South Korea.504 The US auto industry required “corrective measures” to be taken in these markets to offset the US deficit in automotive trade regarding these countries. In the case of Japan, representatives of the Big Three asked for the US government to guarantee the doubling sale of Chrysler, Ford,
500 OFFICE OF THE U.S. TRADE REPRESENTATIVE, 1995 NATIONAL TRADE ESTIMATE-JAPAN 21 (1995). 501 Id. at. 22 502 Satake, supra note 495, at 21. 503 Keiretsu, THE ECONOMIST (Oct. 16, 2009), https://www.economist.com/news/2009/10/16/keiretsu (last visited Oct. 16, 2019). 504 Similarly, representatives of the automotive industry also asked for “corrective action” regarding the closed auto market in South Korea, allegedly protected by tariff and non-tariff barriers. Big Three Letter to Clinton on Korean Auto Barriers, INSIDE U.S. TRADE (July 23, 1993); Big Three Auto Companies Press Clinton to Open Korean Market, INSIDE U.S. TRADE (July 23, 1993); Administration Considering Super 301 to Open Korean Auto Market, INSIDE U.S. TRADE (Aug. 18 1995). page 130 and General Motors vehicles in Japan from 1994 onwards. They pressed for an increase of sales of US automotive parts in Japan as well as the establishment of Japanese transplants in the United States with high local content requirements.505
Under the intense sectorial pressure, the US came within minutes of instituting a defensive tariff against Japanese luxury cars. Clinton attempted to employ Bush's strategy of persuading the Japanese to agree to concrete numerical import targets that would open up specific markets and generally reduce their trade surplus with the United States.506 Once again, the Japanese initially resisted US pressures to intervene in their culturally grounded long-term relations for the purchase and insurance of automobiles between manufacturers, wholesalers, and retailers. Nevertheless, they eventually saw a need for deregulation and a shift of economic power from producers to consumers merely influenced by price and quality.507 Even so, the negotiations never reached an agreement over how to deregulate Japanese markets or open them to foreign firms and investors.508
Clinton then threatened to impose a “Super 301” tariff worth $5.9 billion on 13 Japanese luxury car models if an agreement was not reached by June 29, 1995.509 This unprecedented pressure exerted on Japan was the only reason an agreement was finally reached at two o'clock in the morning on the 29th of June, only two hours after the sanctions were supposed to have gone into effect. The deal featured four main points: first, Japanese auto manufacturers in the US would increase production by 25 percent to 2.65 million vehicles by 1998; second, Japan would import $2 billion more in American car parts; third, Japan’s Ministry of International Trade and Industry (MITI) would send a letter to all Japanese automobile dealers confirming their right to sell foreign cars; and, fourth Japan would deregulate its automobile repair and inspection systems.510 The Japanese agreed to specific
505 Big Three Letter on Japan Talks, INSIDE U.S. TRADE (Feb. 11, 1994). 506 Andrew Pollack, Talks in Japan Fail to Fashion Trade Accord for Clinton Trip, N.Y. TIMES (June 29, 1993), https://www.nytimes.com/1993/06/29/business/talks-in-japan-fail-to-fashion-trade-accord-for-clinton-trip.html. 507 Steven Greenhouse, US Warns Japanese Over Trade, N.Y. TIMES (Jan. 15, 1994), https://www.nytimes.com/1994/01/15/business/us-warns-japanese-over-trade.html; Gwen Ifill, Trade Talks Fail; US Threatens Action, N.Y. TIMES (Feb. 12, 1994), https://www.nytimes.com/1994/01/15/business/us- warns-japanese-over-trade.html; David E. Sanger, Japanese Chief, Due in the US, Faces ‘Impasse’, N.Y. TIMES (Feb. 10, 1994), https://www.nytimes.com/1994/02/10/world/japanese-chief-due-in-the-us-faces-impasse.html. 508 Thomas L. Friedman, US Gains Access to More Markets in Japanese Deal, N.Y. TIMES, Oct. 2, 1994, at l; David Hamilton, US-Japan Deadlock on Trade Reflects Shared Lack of Trust, WALL ST. J., Aug. 2, 1994, at A2, A4. 509 Helene Cooper, US, Japan Inch Forward as Tokyo Offers New Plan, WALL ST. J., June 28, 1995, at A2. 510 Helene Cooper & Valerie Reitman, Adverting a Trade War, US and Tokyo Reach Agreement on Autos, WALL ST. J., June 29, 1995, at Al, A6. page 131 targets only with the provision that no means of enforcing them would be available to the US511
The US-Japan Automotive Agreement512 signed in 1995 increased the sales of North- American produced Big Three motor vehicles in Japan 40 percent during the first half of 1996 compared to the same period in 1995. Total vehicle exports (including transplants) were up 23 percent. Exports of US auto parts to Japan increased by 60 percent since 1992, growing from $1 billion in 1992 to $1.6 billion in 1995. Numerous US parts companies that were previously unsuccessful in Japan now report significant new contracts and sales opportunities. As part of the Agreement, the US negotiated an Interagency Enforcement Team to monitor compliance for five years.513
Amid an international context of liberalization and institutionalization of multilateral and regional trade agreements, the “managed trade” path represented a move in a contrary direction. Though it did not per se configure a measure of domestic protectionism, it de facto operated as one. Effectively, by minimizing the effects of foreign competition on the domestic auto sector, the US industry was shielded from more competitive vehicles that would otherwise have entered the US domestic market. Section 301 of the Trade Act of 1974 enabled the US to implement trade policy abroad, aiming at its more problematic trade partners, to remedy a domestic issue of decreasing competitiveness. As such, its specific domestic regulations coupled with its privileged position in world economic relations guaranteed that it would be able to shape a carve out from more efficient industries and protect its auto sector in spite of the liberalizing tendencies solidifying in international economic relations.
511 In addition, the United States and Japan negotiated and posteriorly signed the Enhanced Initiative on Deregulation and Competition Policy in 1997. The United States-Japan Enhanced Initiative on Deregulation and Competition Policy, commonly known as the Enhanced Initiative, set up a process for U.S. and Japanese officials to address the reform of laws, administrative guidance and regulations that serve as barriers to foreign goods and services. President Clinton and former Prime Minister Hashimoto announced the Enhanced Initiative in June of 1997. It has no expiration date. The Initiative is an ongoing process. See Big Three Letter to Clinton on Korean Auto Barriers, supra note 504; Big Three Auto Companies Press Clinton to Open Koren Market, supra note 504; Administration Considering Super 301 to Open Korean Auto Market, supra note 504. 512 US- Japan Automotive Agreement, supra note 474; USTR Fact Sheet on US-Japan Auto and Auto Parts Agreement Released Jun. 28,1995, supra note 474. 513 OFFICE OF SPEECHWRITING, WHITE HOUSE, TALKING POINTS ON THE US-JAPAN AUTO AND AUTO PARTS AGREEMENT ENFORCEMENT REPORT. 18511409 President (1993-2001 : Clinton). Office of Speechwriting. 1/20/1993-1/20/2001) File Unit Type(s) of Archival Materials: Textual Records The creator compiled or maintained the series between:1995 - 2000 Other Title(s):42-t-7763296-20060469F-Seg2-006-007-2015 ARC Identifier: 18511409 FOIA Tracking Number: LPWJC 2006-0469-F (Seg 2). page 132
b. Redefining Domestic Production
The US managed trade policy initiatives were instrumental in supporting the auto industry in the US during the first years of the 1990s. These policies operated to sustain and support the domestic and regional auto sector through an era of increased influx of automotive goods from Asia and Europe. Besides these initiatives, however, another combined initiative from the auto companies and the federal government also agreed on this purpose: the redefinition of the meaning of “domestic production” in the domestic market. During the first years of the 1990s, the Big Three worked to redefine their domestic market and to maintain their insider status as domestic producers, creating a clear line between ‘domestically produced cars’ and imports. 514
The Big Three’s political actions worked in two main ways. First, they joined efforts to shape the perception of “who are we” in the American market; second, the companies pressured the government to design policies creating different conditions for local and foreign producers.515 Efforts to redefine who the participants of the US automotive unions were and to decide who had a legitimate voice in the making of US domestic and industrial policy continued throughout the 1990s. The American Automobile Labeling Act, enacted in 1992, attempted to shift the consumer preference from a purely domestic to a regional market. These efforts resulted in a long-term strategy to mobilize political groups and effectively legislate to change the traditional narrative of what “domestic” meant in terms of the US automotive market.
c. The US Motor Vehicle Manufacturers Association
An important and symbolic example of the attempt of US Big Three auto companies to shape the market towards their purposes was the decision to expel Honda and Volvo from the US Motor Vehicle Manufacturers Association (MVMA), the organization that represented auto assemblers in the US. From the mid-1980s onwards, Asian automobile corporations started a process to change the perception of the North American public and government to who exactly were the “outsiders” within the auto market. To do so, these firms sought to move assembly and parts production to North America, create strategic alliances with the insiders,
514 Eden & Molot, supra note 428, at 501–42. 515 Id. at 527 page 133 export cars from the US to Japan, and invest in advertising and markets that stressed their contribution to the local economy.
The rapid surge of these new entrants in the market pushed the Big Three to seek alternative means to combat the thriving transplant productions and to retain their domestic market share. To do so, they lobbied politically to underline the outsider-insider distinction in the late 1980s and throughout the 1990s. The outsiders, the remaining automobile producers, primarily Japanese transplant operations in North America (Honda, Mazda, Nissan and Toyota) but also foreign automobile exporters to North America, both Asian and European, spent a great deal of resources trying to combat this categorization. They invested in philanthropy, community outreach and public relations.516
In late 1992, the group expelled Honda, Volvo, and heavy truck makers, which had all previously met the criteria for membership, and changed its name to the American Automobile Manufacturers Association. Restriction on the MVMA membership was an attempt to allow the Big Three “to focus on common issues and interests that are unique to the domestic manufacturers.”517 The MVMA also strengthened its ability to speak for the Big Three in debates over trade, technology, and regulation by taking over the activities of the US Council for Automotive Research.
The association now was back to its traditional stance of representing the "Big Three" manufacturers and their exclusive takes on trade, emissions, and fuel economy.518 The change also led to a headquarter move from Detroit to Washington, D.C., to guarantee a strong governmental presence. With the Daimler-Chrysler merger of 1998, the American Automobile Manufacturers Association was thus phased out in January 1999, and a new and different successor group, the Alliance of Automobile Manufacturers, was formed that included a large number of foreign-owned manufacturers.
This move effectively transformed the automakers' trade association into a more explicit nationalist lobbying arm representing only the Big Three.519 This political move was crucial
516 BARBARA WANNER, JAPANESE CORPORATE CITIZENSHIP ENTERS NEW PHASE A 29 (Japan Econ. Report, JEI Report No. 40, 1993). 517 Doron P. Levin, Big 3 Backs Expulsion of Honda, N.Y. TIMES, Nov. 26, 1993. 518 Max Gates, AAMA’s Card Emerges as Big 3’s Ambassador in Washington, AUTOMOTIVE NEWS (Mar. 14, 1994), https://www.autonews.com/article/19940314/ANA/403140838/aama-s-card-emerges-as-big-3-s- ambassador-in-washington. 519 STAN LUGER, CORPORATE POWER, AMERICAN DEMOCRACY, AND THE AUTOMOBILE INDUSTRY 155 (2000). page 134 to ensure that the industry would act in pursuit of the same interests during this period of market opening across the globe with the establishment of the WTO and of NAFTA as well as to manage the increased competitive threats coming from Asian producers. This pattern of cooperation and support would come to shape most of the government policies during the 1990s towards the sector.
d. The American Automobile Labelling Act
The American Automobile Labeling Act (AALA)520 was enacted on October 1992 to aid potential purchasers in the selection of new passenger motor vehicles by providing them with information about the country of origin of vehicles and their parts.521 The AALA provided that new passenger cars, pickup trucks, vans and sport utility vehicles manufactured on or after October 1, 1994 should have labels specifying the percentage value of the US or Canadian parts content of each vehicle, the country where the vehicle was assembled, and the countries of origin of its engine and transmission.522
Specifically, the law required automakers to disclose: (i) the content percentage of United States and Canadian parts, on a model-by-model basis; (ii) the country, state and city of final assembly; whether countries other than the United States and Canada supply 15 percent or more of the parts in the vehicle; (iii) the country of origin of the engine and transmission (the country adding 50 percent or more of the value or the most added-value). While the AALA included Canadian content with parts sourced in the US, everywhere else counts as “foreign”—even Mexico, despite both Canada and Mexico being part of the North American Free Trade Agreement (NAFTA). Such geographical anomaly came to pass given that Detroit’s Big Three automakers owned a string of auto and component plants just northeast of Detroit in Ontario.
The labeling rules were designed to ensure “truth in advertising” according to then-president Andrew Card of the American Automobile Manufacturers Association, which represented the
520 This measure was introduced by Senator Barbara Mikulski as an amendment to Transportation appropriations legislation and added by voice vote in the Senate on August 30, 1992. It was signed into law as Section 355 of P.L. 102-388 on October 6, 1992. 521 American Automobile Labeling Act, Pub. L. 102-388, title III, sec. 355, 106 Stat. 1556 (1992) (codified as amended at 49 U.S.C.S. §32304). 522 On July 21, 1994, the National Highway Traffic Safety Administration (NHTSA) published a new regulation to implement the AALA (Part 583 of Title 49 of the Code of Federal Regulations). Under the American Automobile Labeling Act (AALA), all automakers report annually to the National Highway Traffic Safety Administration (NHTSA) the foreign and US/Canadian content of all cars sold in the United States, and must list the country of origin of the engine and transmission. page 135
Big Three interests in Washington at that time and which supported the law. 523 A United Auto Workers spokesman added that consumers needed to have this important information and that the “Japanese [would] dislike it because it doesn't allow them to hide the fact that a large part of their parts still come from abroad.” Critics noted that the law established arbitrary rules when applying its requirements to suppliers, for example, that content in a Toyota-badged vehicle and a GM-badged vehicle from the same joint venture operation (Fremont, California) could be counted in different ways because Toyota and GM might have different relationships with the suppliers.524
Indeed, at the time of its implementation, Japan expressed concerns that the system was in fact, a “Buy American” provision that implicitly attempted to call on consumers to buy domestic goods. Besides the requirement of labeling percentages of domestic content in each vehicle, the law required that foreign automakers with operations in the United States, who tend to use large amounts of non US/non-Canadian parts, and dealers who import vehicles, to take on an enormous amount of clerical work and record-keeping in order to calculate parts percentages. Japan argued, therefore, that the system was likely to become an unnecessary obstacle to trade and may be in violation of Articles 2.1 and 2.2 of the TBT Agreement.525
It argued that the system distinguished between parts purchased from wholly-owned subsidiaries and independent suppliers, and used different methods to calculate their value. Parts from wholly-owned subsidiaries could be counted at full purchase price even if their local content was less than 70 percent, while parts from independent foreign suppliers were not allowed to count as domestic parts at all unless their US/Canadian content was in excess of 70 percent. Japan alleged that this provision disadvantaged foreign automakers since they rarely have wholly-owned parts subsidiaries.
Besides, it argued that these calculations were based on model averages. Thus, if the same model was produced both inside the United States and in other countries, a weighted average of the two would be applied. As a result, the content of cars produced by foreign automakers within the United States was understated, because foreign automakers typically have factories
523 STEPHEN COONEY & BRENT D. YACOBUCCI, U.S. AUTOMOTIVE INDUSTRY: POLICY OVERVIEW AND RECENT HISTORY i-102, 85 (2005). 524 Id. at 85. 525 JAPAN MINISTRY OF ECON., TRADE AND INDUS., 2015 REPORT ON COMPLIANCE BY MAJOR TRADING PARTNERS WITH TRADE AGREEMENTS - WTO, FTA/EPA AND IIA 139–209 (2015), http://www.meti.go.jp/english/report/data/2015WTO/01_03.pdf. page 136 in other countries besides the United States and Canada. Finally, Japan argued that content was also calculated in a distorted manner: labor was not included; the assembly process was separate from the painting process; the local content was calculated only in terms of parts prices. All of these miscalculations would accrue to an understatement of US/Canadian value.
These two instances of creative lobbying by the Big Three led to the establishment of an important political group to push its interests and to the approval of the ALAA as a significant piece of domestic regulation to further insulate them from international competition within the US market. The rebranding of the automotive sector in the US in the early 1990s, as exemplified by the two initiatives described above, is symbolic of how both the US government and the industry leaders sought to act together to offer alternative ways to insulate and to protect the domestic production in a way that would not be seen as open intervention in the sector or as protectionist measure.
3. Global Value Chains and Corporate Governance
The automobile industry is a compelling example of the dominance of corporations as modern institutions in the realm of public policy in the United States. Throughout the 1990s, the Big Three American producers played a major role in shaping public policies that impacted the auto industry: from the creation of regulatory paradigms to influencing international trade policy and international agreements. The present case analysis shows that auto industry representatives were involved in each of these initiatives. Similarly, in a study of the corporate power of the American auto industry in policy-making, Luger argues that the auto industry efforts to influence the political system are so broad and diverse that a description of the full extent of their influence is difficult to precise.526
Effectively, automakers pervasively influenced, shaped, and defined public policy throughout the 20th century in the United States.527 The Bush and Clinton administrations in the 1990s were no different. 528 Together, these administrations mildly prodded the auto companies on
526 Id. at 183. 527 Id. 528 Interestingly, the only policy that was implemented without the support of the auto industry during this period was the Clean Air Act of 1990. The 1990 Clean Air Act addressed four main air pollution problems: urban smog, air toxics, acid rain, and stratospheric ozone depletion. The standards for motor vehicles and fuels included more than ninety provisions covering conventional vehicles and a first time requirement to control emissions from non-road vehicles such as trains, ships, lawn mowers, and farm equipment. Though the bill was eventually passed in 1992 representing a setback for the auto industry, the ten-year delay in its passage cannot be considered as a defeat for the auto lobby. Industry officials were able to delay tighter mandates on vehicles emissions even though their products are the major source of urban air pollution with significant mortality page 137 pollution and safety but protected them from efforts to raise fuel economy standards.529 With Bill Clinton’s reelection in 1996, industry leaders concluded that either way, Detroit would be a winner.530 Elliott Hall, head of Ford’s Washington office stated that a Clinton reelection with a Republican congress would be the best outcome for the auto industry: a president using federal programs to aid the auto industry and a Congress willing to protect the auto industry against new regulatory burdens.
While negotiating and implementing regional and multilateral trade agreements across the globe, these two administrations aided the US domestic auto industry in three main ways. First, the managed trade policy initiatives aimed to open the Japanese and Asian markets for US producers (see Section 2.a). Second, the US Big Three automotive producers were behind most of the initiatives to regulate and to redefine a domestic and regional market for their vehicles (as seen in this Section). Third, the growing concern with the competitiveness of the US auto industry led to the development of the most noteworthy feature of this period: the advanced battery consortium and the “Supercar project,” both joint industry-government research projects in which the federal government provided the matching dollars for technology development. These projects represented an embrace of neoliberal bureaucratic arrangements, based on business-government cooperation in which government actively and consciously supports business.531
Regarding the joint research and development partnerships, the Bush administration delivered to the US Congress the first technology policy statement on September 26, 1990. In this document, some advanced technological fields, namely, robotics, high-performance computing, semiconductors, superconductivity, and advanced imaging technologies, were targeted as also falling into Federal research and development (R&D) responsibilities and demanding multi-agency efforts. Some others, like biotechnology, alternative energy, and transportation, were also identified as requiring strong Federal government support.532 Subsequently, in 1992, the United States Council for Automotive Research LLC (USCAR)
consequence. And even though cats would have to meet stricter requirements, they were nevertheless less stringent than the standards imposed by California. See Henry Waxman et al., Cars, Fuels, and Clean Air: A Review of Title II of the Clean Air Act Amendments of 1990, 21 ENVT’L L., 1947–2019 (1991). 529 Id. 530 Phil Frame, Clinton or Dole? Detroit a Winner, AUTOMOTIVE NEWS, Aug. 19, 1996, at 1. 531 Luger mentions that, for many, the main model for this institutional arrangement is the Japanese MITI. Similar arrangements between state-corporations designing development policies will emerge in the following decades in developing countries such as China, India, Brazil. Id. at 155. 532 ALLEN BROMLEY, OFFICE OF SCI. & TECH. POL’Y, EXEC. OFFICE OF THE PRESIDENT, US TECHNOLOGY POLICY (1990). page 138 was founded to strengthen the technology base of the US auto industry through cooperative research and development. Through partnerships with various stakeholders, including the federal government, educational institutions, and suppliers, its main focus was to create and direct US cooperative research and development to advance automotive technologies.533
The US Advanced Battery Consortium LLC, an industry group operated by Chrysler, Ford, and General Motors as part of the United States Council for Automotive Research United States Council for Automotive Research LLC (USCAR) was an example of this. The United States Advanced Battery Consortium (USABC)534 pursued research and development of advanced energy systems for electric and hybrid electric vehicles to achieve significantly increased range and performance. The stated purpose of the USABC was to work with advanced battery developers and companies that will conduct research and development (R&D) on advanced batteries to provide increased range and improved performance for electric vehicles in the latter part of the 1990s. In addition to the three automakers, participants in the USABC included the US Department of Energy (DOE), through a cooperative agreement with the partnership, and the Electric Power Research Institute (EPRI), through a participation agreement.
The creation of this consortium as well as of the USABC was partly motivated by the recent California Air Resources Board (CARB) regulations for low-emission vehicles and clean fuel standards for emissions applied to vehicles after 1994. The USABC consortium has brought together automotive and battery manufacturers, electric utilities, and DOE to provide a venue for a focused approach to meeting EV requirements.535 For the first time, a forum was established for integrating the battery into a vehicle, as well as for evaluating the transportation infrastructure requirements for EVs. In the cooperative environment provided by the USABC, several major companies, including 3M, Hydro-Québec, national laboratories, and the three automotive companies, brought together the needed expertise, which significantly advanced the technology. The USABC acted to establish performance goals consistent with both the CARB mandate and the marketing assumptions made by the
533 Who We Are, About USCAR, U.S. COUNCIL FOR AUTOMOTIVE RESEARCH LLC., https://www.uscar.org/guest/history.php (last visited Oct. 16, 2019). 534 US Advanced Battery Consortium LLC, U.S. COUNCIL FOR AUTOMOTIVE RESEARCH LLC, https://www.uscar.org/guest/teams/12/U-S-Advanced-Battery-Consortium (last visited Oct. 16, 2019). 535 NAT’L RESEARCH COUNCIL, EFFECTIVENESS OF THE UNITED STATES ADVANCED BATTERY CONSORTIUM AS A GOVERNMENT-INDUSTRY PARTNERSHIP 58 (1998), https://www.nap.edu/catalog/6196/effectiveness-of-the- united-states-advanced-battery-consortium-as-a-government-industry-partnership. page 139 three major US automakers. The goals reflect a legitimate view of requirements to meet the CARB mandate with vehicles that could be successful in the marketplace.536
A number of other initiatives were developed in relation to automotive technology.537 In 1993, President Clinton initiated the Partnership for a New Generation of Vehicles (PNGV).538 This new partnership articulated the Big Three, the Department of Commerce (DOC), Department of Transportation (DOT), Department of Energy (DOE) and the Department of Defense (DOD). The cooperative R&D program sought to build a “Supercar” advance manufacturing techniques that helped get new products ideas more quickly into the marketplace as well as develop technologies that can lead to near-term improvements in automobile efficiency, safety, and emissions. More specifically, the goals of the PNGV were: (i) to improve national manufacturing competitiveness; (ii) to implement commercially viable technologies that increased the fuel efficiency and reduce the emissions from conventional vehicles and (iii) to develop technologies for a new class of vehicles with up to three times the fuel efficiency and emission performance of midsize family sedans in 1994.539
The goal was to build a “Supercar,” as per the project’s unofficial name,540 or super-efficient prototypes that the industry could translate into production. Though the ultimate goal of producing a car capable of reaching 80 mpg was not achieved, Ford, GM, and Chrysler made significant advances in HEV and EV technology. For example, the roots of the Chevrolet Tahoe SUV Hybrid, GMC Yukon SUV Hybrid, Saturn Aura Hybrid Sedan, Chevrolet Silverado Full Hybrid Pick-up and the Saturn Vue Green Line SUV Hybrid are found in the GM concept vehicles such as Precept and Ultralite.541
The decentralized nature of this public investment in innovation, Mazzucato argues, marks the strategic role of public financing of innovation and the market-making and market- shaping, not only market-fixing role of public finance.542 The entrepreneurial state role thus challenges the notion of the entrepreneur being embodied in private business, and policy-
536 Id. at 58. 537 See Who We Are, About USCAR, U.S. COUNCIL FOR AUTOMOTIVE RESEARCH LLC., supra note 533. 538 ALBERT N. LINK ET AL., BATTERY TECHNOLOGY FOR ELECTRIC VEHICLES: PUBLIC SCIENCE AND PRIVATE INNOVATION 4 (2015). 539 Id. 540 ALLEN FUHS, HYBRID VEHICLES: AND THE FUTURE OF PERSONAL TRANSPORTATION 11 (2008). 541 Id. 542 Mariana Mazzucato & Gregor Semieniuk, Public Financing of Innovation: New Questions, 33 OXFORD REV. ECON. POL'Y 24, 24–48 (2017). page 140 making being an activity outside of the entrepreneurial process.543 The decade long effort of the US government to advance the Big Three automakers towards the development of new technologies and their respective markets indeed blurs the lines between the entrepreneurial process and policy-making. The interplay between the automotive industry and the US government illustrates how corporate governance in the United States is embedded with policy-making, shaping agendas, priorities, and timeline for policymaking.
4. Informal Regulations and Standards
The Corporate Average Fuel Economy (CAFE) standards, approved by the US Congress through the Energy Policy and Conservation Act of 1975, obligated automobile manufacturers and importers to achieve certain levels of average fuel economy for the vehicles they handle, providing fines levied for violations. Though constituting US domestic law, the CAFE standards refer not only to its environmental importance as a US government policy objective but also to the regulatory role it played in consolidating a regional market under NAFTA and artificially creating different competitive markets for domestic and foreign producers. CAFE standards were at the center of a regulatory battle between players in the auto-industry and played an important role in shaping the US auto policy throughout the 1990s. This argument relies on the fact that although not a part of a cohesive set of industrial measures, the use of CAFE standards largely contributed to the strengthening and development of the US auto industry in the period under analysis.
Specifically, this Section outlines three ways in which these regulatory standards were used as an instrument to support the US auto industry in the 1990s. First, the CAFE standards were instrumental in creating an artificial incentive for the Big Three US producers to manufacture small fuel-efficient vehicles by creating separate requirements for domestic and foreign producers under the CAFE “two fleet” rules. Second, the inclusion of the production of assemblers based in Mexico to count towards Mexican value-added toward the CAFE standards was another coordinated strategy between the auto industry and the United States government to use fuel efficiency standards to integrate the national auto industry markets in the region. Last, CAFE regulations were instrumental to create a perception of “domestic product” that referred to continentally produced goods after NAFTA.
543 MARIANA MAZZUCATO, THE ENTREPRENEURIAL STATE: DEBUNKING PUBLIC VS. PRIVATE MYTHS IN INNOVATION (2013). page 141
The CAFE standards were at the center of the regulation of the auto industry due to the close relationship between the price of oil and the incentives for fuel efficiency regulation. When the standard was enacted, in 1975, it responded to the Arab Oil Embargo of 1973 that revealed the economic vulnerability that followed from the nation's growing dependence on foreign oil. The incident galvanized President Ford and the 94th Congress to act to remedy what was widely seen as a serious and imminent threat to national security.544 Taking note of recent successes with technology-forcing regulation of the auto industry, the Democratic Congress viewed fuel economy standards as an opportunity to address a major national issue without the risk of a political backlash. By the time the CAFE standards were enacted, the auto industry was the only opponent to the new fuel economy standards. It only compromised after the inclusion of the two fleet provisions whereby domestic and imported vehicles were distinguished and their average fuel economy calculated separately.
For the first time, in 1985, the rapid decline in gasoline prices during the mid-1980s, attended by a shift in consumer demand away from smaller, more fuel-efficient models led to the lowering of the CAFE standard from 27.5 mpg to 26 mpg. 545 The National Highway Traffic Safety Administration (NHTSA) based its decision on claims from GM and Ford that they were unable to comply with the 27.5 mpg standard due to the decline in gasoline prices during the mid-1980s. Such resistance to fuel economy regulation, largely supported by market conditions, peaked in the 1990s. Throughout the decade, the monthly average gas price ranged from a low of $1.23 to a high of $2.22, and averaged $1.64.95.546
The Big Three’s financial condition greatly improved as consumer demand continued to shift toward less fuel-efficient vehicles: light trucks (SUVs, vans, and pickups) rose from 26.5 percent of US passenger vehicles in 1990 to 37.2 percent in 2000.547 As such, with the domestic industry concentrated on production of more profitable larger cars, the CAFE standards “two-fleet rule” created an incentive for the Big Three to manufacture small cars in
544 President Gerald Ford, Address Before a Joint Session of the Congress Reporting on United States Foreign Policy (Apr. 10, 1975). 545 Pub. Citizen v. Nat’l Highway Traffic Safety Admin., 848 F.2d 256, 260 (D.C. Cir. 1988). 546 See Short-Term Energy Outlook, U.S. ENERGY INFO. ADMIN., https://www.eia.gov/outlooks/steo/ (last visited Oct. 15, 2019). 547 Annual US Imports of Crude Oil, U.S. ENERGY INFO. ADMIN, (last visited Oct. 10, 2019). https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php page 142 the United States, since this was the only way to gain sufficient small car credits to offset domestic production of large, fuel-consuming automobiles.548
Also, the CAFE separation of fleets in (i) domestically produced; (ii) foreign-produced and (iii) light trucks has directly affected the US industry, and the ways vehicles are designed. Under the “light truck” definition, all pick-up trucks, SUVs, vans and mini-vans qualify and the CAFE category of “light trucks.” The production of such designs is traditionally strong in the US industry when compared to European and Asian producers and has benefited from a different category of its own to comply with CAFE requirements. This distinction has drawn criticism from environmental groups, given that these vehicle designs have covered more than half of the US passenger vehicle market.549
Second, the CAFE standard was strategic when it came to the two-fleet rule and the inclusion of Mexican manufacturers. As noted above, the CAFE standard must also be met separately for domestic and imported production within a manufacturer – the “two-fleet rule.” This distinction is especially relevant for US automakers who have production facilities in the US but have also offshored to Mexico. Prior to NAFTA, US firms had to meet the standard separately for their US and Mexican production. However, after NAFTA vehicles produced in Mexico were treated as domestic production. The CAFE standards were included in NAFTA as to allow assemblers producing in Mexico before the model year 1992 to count Mexican value-added towards the CAFE standards after 1997, provided that the vehicle is imported for sale in the United States and meets the 75 percent North American-content requirement. Alternatively, for manufacturers that initiated production in Mexico after that model year, NAFTA provides for Mexican value-added to be counted towards CAFE requirements either in the first model year after 1994 or from the day the production started.550
Last, the regulation of CAFE standards were also used to shift the perspective of national content in vehicle to regional contents, namely, North American content. The application of CAFE standards to Mexican vehicles possessing a determinate percentage of North-American input not only shifted the incentive of production in the region but also changed the public perception of the extents of the local automotive industry to beyond merely national borders.
548 Taxes on Automobiles, supra note 446, at para. 3.288. 549 Cooney at 85–86 550Id. at 18. page 143
5. Case Study Conclusions on the United States
In a world of constructive comparative advantage, legal, political, and economic agents - the state among them - shape international competition and international rules. The present case study has shown how a combination of state and corporate articulation during the 1990s worked to revamp and to place the US automotive industry in a more beneficial position in the global economy. Not only so, but it also demonstrated how domestic, regional, and international rules were used to create a comparative advantage for the US automotive industry in a period of relative industrial hardship. The use of law for this purpose was not only instrumental in the sense that it allowed for the US to put in place different kinds of regulatory arrangements to protect its automotive industry, but it was also constructivist insofar as it shaped understandings of what an ideal market organization was within the international trading system.
In this analyzing the constructivist use of law, this Chapter demonstrated how specific legislation enacted in the US changed the country’s ability to implement measures it deemed appropriate for its domestic industry regardless of the contours of international trade law. The United States Trade Act of 1974 through its Sections 301-310 was instrumental in defining what the US deemed “unreasonable” or “unjustifiable” in other countries’ regulations. Importantly, the Act did not only evaluate countries “unreasonable” or “unjustifiable” trade measures but also any domestic or regional measure that negatively impacted the trade interest of US industries. In this manner, this specific feature of the US domestic legislation, allied to the US’ strategic position as an economic powerhouse, was instrumental in opening markets around the globe in accordance with US government and industrial preferences.
Arguably, this combination achieved significantly more than that. In a period where market liberalization was at its peak, the use of Section 301 by the US government influenced to shape rules and standards that were being negotiated in the Uruguay Round. The transnational effect of the use of Section 301 extended further: it set out baselines that would be transnationally incorporated in regional and bilateral agreements across the globe as well as in domestic legislations of trading partners. The US’ understandings of “reasonable” and “just,” naturally drawing upon its own internal balance and domestic structures were used to establish an international regime on goods, services, intellectual property rights, and telecommunications consistent with the United States' market consideration standards.551
551 Molyneux, supra note 485, at 132. page 144
According to Molyneux, through the 1974 Act, the US “solved the paradox of world interdependence by means of creating adequate constitutional cooperation procedures which permitted a reasonable input of constituency pressure while at the same time making possible an effective trade policy which allowed it to lead the international trading system.”552 Therefore, law operated in a constructivist fashion as it helped to create regulatory preferences and ideational understandings about how public and private actors should interact, what trade partners should expect of each other, and how they should behave towards international legal structures.
Instrumentally, US domestic laws and informal regulations were used to mobilize political groups and redefine the limits of “domestic” and “foreign” production in terms of the US automotive market. These initiatives varied from legislative initiatives such as the American Automobile Labeling Act implemented for vehicles after 1994 to corporate regulations such as the redefinition of which companies qualified as a “US Motor Vehicle Manufacturer.” In the latter case, the US Motor Vehicle Manufacturers Association (MVMA) underwent multiple reforms to include and exclude specific auto companies according to their nationality. These moves are representative of how both the US government and the industry leaders sought to act together to offer alternative ways to insulate and to protect the domestic production in a way that would not be seen as an open intervention in the sector or as a protectionist measure.
Under the umbrella of regional and bilateral agreements, law was also an instrumental vehicle to export aspects of the Canadian – US Free Trade Agreement (CUFTA) to the establishment of the tripartite NAFTA agreement. As a general rule, they aimed to raise the thresholds for vehicles to be considered North American and to create more obstacles for foreign vehicles to enter the NAFTA market. This is true with regards to NAFTA’s new rules of origin and local content requirements. The former rule emphasized “substantial transformation” as the general criterion for a vehicle to be characterized as North American. Whereas the latter, the local content requirement was raised to 62.5 percent for passenger vehicles and light trucks, their engines, and transmissions and 60 percent for all other vehicles and parts. With the implementation of such thresholds, foreign automotive producers (especially Japanese and Asian producers) would no longer be able to use Mexico as an export platform to sell into the United States and Canada. As such, national content requirements were transformed into
552Id. page 145 regional content requirements and a ten-year phase-out period (starting in 1995) was scheduled for the Mexican Automotive Decree of 1989 as well as a termination of Mexican restrictions on ownership of auto parts and component producers. The US experience with the establishment of NAFTA was especially concerned with the US goals for developing its automotive industry and shielding it from increased competition from other trade blocks.
With regard to how American measures for the automotive industries were received at the WTO, two out of the four United States’ measures (the gas-guzzler tax, the luxury tax, the CAFE standards, and the Sections 301 – 310 of the 1974 Trade Act) were deemed to be WTO inconsistent. Regardless of these findings, the CAFE standards and the Sections 301 – 310 of the 1974 Trade Act were not brought into compliance and there was no effective restriction of the US’ regulatory autonomy or its ability to maintain them in place.
As explained in Section 1, there are different reasons for the lack of effectiveness of these GATT and WTO decisions. In the case of the CAFE standards, the United States blocked the adoption of the GATT panel report and informed that it did not plan to change the CAFE standards mechanism. It argued that because the European Union could not show the economic harm required by the GATT, it saw no obligation to bring its measures into conformity with GATT obligations.
In the case of the dispute regarding Sections 301 – 310 of the 1974 Trade Act, despite recognizing that the measure at issue would enable the US to act in a manner inconsistent with WTO rules, the panel opted for a different formalistic route. It asserted that the USTR’s Statement of Administrative Action curtailing its discretion within Sections 301 – 310 of the Act as well as its statements before the Panel represented credible commitments that the US would not use the discretion allowed for under Section 301 – 310 in a manner contrary to WTO provisions.
The case analysis of the United States shows that even though rules of international trade were structurally determined, it still managed to find room for agency and shape procedure in order to maintain its regulatory arrangements in place.553 In this sense, different kind of state structures as well as states’ interaction and proximity to transnational corporations act to create, propagate and shape regulatory preferences across the world. Different legal
553 PETER EVANS, EMBEDDED AUTONOMY: STATES AND INDUSTRIAL TRANSFORMATION 8 (1995). page 146 instruments, therefore, cannot only change the experience of policy space but can effectively shape the contours of policies and preferences for other countries and institutions.
C. A Comparative and Distributional Analysis of Policy Space for Chapter III
The case studies above sought to first provide a realist perspective on the web of regulations that operate to constrain and restrict countries economic policies. They showed how institutional preferences were manifested not only at the international level but, importantly, also were determinative in other levels and regulatory frameworks. The conclusions to both of these case studies show that international trade agreements are not the only, or most important, factor constraining and shaping the conduct of development policy. Indeed, other regulatory frameworks such as domestic institutions, regional deals, supply chain governance structures, and informal regulations need to be taken into account. These insights are crucial to understanding how countries decisions are differently regulated within the global trading system and what options are available to them at each point in time. The comparative examples of Brazil and the US exemplified the different restrictions or allowances each country experienced in a set regulatory context, influencing the effectiveness and permissiveness of their policies.
This final Section of the Chapter moves on to the second contribution of the thesis. It analyses how the constellation of regulatory influences present in each case study described above has different distributional implications for each country. That is to say, the manifestation of regulatory autonomy within the trading system as whole has important parallels with how international trading rules effectively translate to each country.
This concluding Section shows how the universalizing principle of international law and the notions of “autonomy,” “capacity,” “policy space” effectively meant different things to Brazil and the US in the early 1990s. Importantly, it also notes how carmakers in each country experienced, contributed, and felt this regulatory shift in different ways in each of the countries. As such, from the starting point, this case study suggests that there was an effective distinction between “formal” and “real” policy space and regulatory autonomy with regards to the regime.
Drawing on the three analytical viewpoints outlined in Chapter I, respectively, the current Chapter offers different contributions into the dynamic of policy space. First, drawing on the page 147 notion of ‘dynamic of differences’ the Chapter shows how the two countries experiences reflect a different de facto ability to implement developmental and industrial policy.
Second, the case studies showed how different developmental needs and institutional organizations of members led the two countries at hand to implement policies of different nature, both technically and substantively. The direct comparison illustrates how the choice of regulatory preferences at the establishment of the system operated to freeze on available development path – and worse – to respond to one specific developmental need directly impacting the distributive consequences of the system.
Third, the Chapter shows how experts operated, in different moments, to effectively naturalize economic values that were the preference of some members to the detriment of others. The ways in which the system responded to both countries’ regulatory preferences was widely different due to sustaining work of experts and professionals that inevitably have propagated and legitimized specific economic choices for a quasi-universal system.
1. Policy Space and the Dynamic of Differences
The case studies in this Chapter provide useful insights to understand some of the many spheres of regulatory autonomy under the framework of international trade law. They illustrate how the idea of the ‘dynamic of differences’ (see Chapter I) remains present in international law. Here, it was manifested in the form of regulatory changes required to each country to adapt their domestic system to the emerging WTO system and the liberalizing waves of the early 1990s. While both countries were founding parties of the GATT 1947, their domestic institutional preferences remained very different. This difference largely accounted for the mechanisms and leverage tools available to them in implementing policies for the auto-industry. This is also accounted for with regards to the needs of their auto- industries at that point in time. In different places within the production chain, the industry in each country responded more or less to business strategy, to government pressure and to external rules and regulations.
In Brazil, the case study shows how both MERCOSUR and WTO membership changed the shape of the Brazilian New Auto Regime. Though it does not argue that this is either a positive or a negative development, it verifies the direct effect these two regimes of international law had on a previously set domestic economic policy for the industry. With regards to multilateral trade rules, limitations were imposed by the WTO to the Brazilian page 148
New Auto Regime in two main ways. First, Brazil had to withdraw its import quota to equilibrate the balance-of-payments due to the WTO understanding that the seriousness of the Brazilian situation did not constitute a “critical situation” under paragraph 9 of Article XVIII of the GATT. The decision of what was deemed to be a “critical situation” ultimately came down to Members’ understandings and standards irrespective of the Brazilian position. This is important not only as it relates to understandings that were external to Brazilian domestic policy as to what a critical balance of payment situation consisted of, but it is also relevant because it is an entry point to understand the role of experts in shaping key economic concepts. In this case, the optimal or the adequate measure of what constitutes a balance of payment crisis for a specific country at a given point in time. (See Section A.2.b)
In this sense, according to different standards of what constitutes a “critical situation” for a balance-of-payments, the effective leeway allowed for each is substantively different. Anghie’s’ ‘dynamic of differences’ explained in Chapter I is exemplified here in the analysis of what Brazil considered a “critical situation” in its balance-of-payments and what a superstructure, namely, the WTO, oriented towards an Anglo-American understanding of appropriate economic policy, deemed adequate. This difference in measure is illustrative of a formal and a de facto policy space for regulation within the same system of rules.
Additionally, after consultations and negotiations at the WTO, Brazil agreed to change numerous aspects of the New Auto regime, including, the nationalization index, “additional exports” bonuses, duration of the program; duration of applications for the program, extra quotas for the European Union, South Korea and Japan as well as further tax reductions. In the first moment, no part of the Brazilian import quota was allowed to remain in place after WTO scrutiny. In the second moment, the remaining original regulations of the New Auto Regime were so broadly modified that, at the time of the program’s expiration, it barely resembled in law or in fact the original New Auto Regime.
In the case of MERCOSUR, two major changes were required of the Brazilian New Auto Regime. First, it led Brazil and Argentina to sign a new agreement in 1999 under the auspices of MERCOSUR whereby the auto industry became one of the main exemptions from harmonization and reduction of external tariffs. Second, Brazil and Argentina agreed to mutually recognize each other’s national regimes for the auto industry and to develop complementary auto industry sectors in their respective territories, shifting the organization and division of the auto industry in the southern cone. This meant that not only legal page 149 domestic and international arrangements were shaped but that the organization of production of the auto industry were coordinated and integrated among Brazilian and Argentinean producers.
Here, a bilateral change was required of both countries, amending legislation, production processes, and a regional industry. Though not in the level of international policy space, the practical implementation of what was the Brazilian New Auto Regime also led to a de facto cut back. The economic integration between the Argentinean and the Brazilian market required a different set of rules and organizational structure than envisioned in the New Auto Regime. As such, for both countries, a revision in the policies for the auto industries came to be implemented because of their previous agreements under the MERCOSUR as well as due to the production chain established between both countries.
The example of MERCOSUR, Argentina and Brazil is helpful to demonstrate two issues: first, that other international law arrangements may constrain national economic policy just as much as the multilateral trading system. Though this is not a problem in itself, it raises awareness regarding the distributive consequences of these bilateral and regional systems of law in regulating economic integration between two countries. Second, the example of MERCOSUR and the New Auto Regime also takes us back to the fragility of the concept of legal policy space in economic regulation. In effect, the implementation of international economic law is constrained by arrangements that can account for a complete change of its direction and, a concrete need for even further legislation to be created, as was the case with the Auto Agreement between Brazil and Argentina of 1995.
Meanwhile, the case study of the United States suggests a different relationship with the GATT rules and the newly established WTO system. While the US – Automobiles dispute at the GATT worked as a thermometer of the limits of regulatory policy space within the trading system, it also showed how the system enabled the United States to keep its measure in place. First, with the US – CAFE Standards dispute and then with the US – Section 301 dispute. Despite the recent establishment of the WTO, the United States chose to continue implementing specific policies for its automotive industry in contempt of the multilateral liberalization it championed. page 150
As per the rules of the GATT, the United States blocked the adoption of the Panel report and informed that it did not plan to change the CAFE standards mechanism.554 The United States took the position that the European Union could not show the economic harm required by the GATT to prove harm in its commercial interests or to impose countervailing measures.555 On the basis that no harmful economic effect could be demonstrated, the United States opted not to bring its measures into conformity with the GATT as required by the Panel report.
Thus, internationally, Brazil and the United States faced different ordeals to adapt their domestic regulations and economic policy and industrial policy to the rules of the early 1990s. While the Brazilian New Auto Regime was drastically modified because of the WTO’s dispute settlement mechanism, the United States managed to uphold its measures in spite of the newly established system. For Brazil, joining the WTO meant a process of readapting its traditional state-centric industrial policy to promote more integration of its domestic industry in global value chains according to the preference of investors and large multinationals. The possibility of institutional neutrality and responsiveness to country- specific developmental strategy was not verified in Brazil, but allowed for in the US context. As such, the idea of dynamic of difference was again propagated, creating de facto different real possibilities among different countries both because of the same system of international trade law. It is also clear with the case studies that the notion of the policy space in international trade obscures complex legal relationships that propagate the continuity of exchanges among countries.
Regionally, the United States sought to improve conditions of market access in Mexico for US investors and traders, which had been a long-term US economic objective. Although Mexico had taken steps to liberalize its automotive sector since joining GATT in 1986, full liberalization of the Mexican auto industry only culminated with NAFTA. The agreement dismantled Mexico’s protectionist auto regime but allowed for a long phase-out period. National-content requirements became regional-content requirements, a ten-year phase out period was scheduled for the Mexican Automotive Decree of 1989 and a termination of Mexican restrictions on ownership of auto parts and component producers.556 These measures gave the Mexican auto industry breathing room to meet import competition. Meanwhile,
554 GATT Rules against CAFE, Opens Door to Conservation Exception, supra note 464. 555 Id. at Si (quoting U.S. Trade Representative Mickey Kantor as stating after the CAFE report that the United States “does not intend to make any changes to the CAFE rules”). 556 Eden & Molot, supra note 428, at 29. page 151
NAFTA ensured immediate and unfettered access of Mexican automotive products to the US and Canadian markets.
The case example shows that, despite its efforts to promote market access around the globe, the United States managed to keep its domestic industry safeguarded while pursuing market access for its vehicles abroad. Tellingly, the threat of the use of US sanctions under Section 301 also provided significant leverage for opening markets on a unilateral basis. By authorizing the imposition of increased tariffs, or quantitative restrictions, Section 301 afforded the domestic legal basis for enforcing a trade measures unilaterally. This context meant that the US managed to promote open markets for its products abroad, while trade rules effectively stopped other countries from promoting different kinds of measures that were connected to their auto-industry. In addition, the weight of its Section 301 actions operated as an effective tool to open markets in their desired industry and countries in spite of the Single Undertaking and the negotiating efforts of the Uruguay Round.
In both Mexico and Japan, the US managed to project trade regulations and the threat of trade retaliation (or trade exclusion) to its benefit, promoting significant change not only in market access but in countries’ broader regulatory framework. In Mexico, the Big Three US producers got most of what they wanted out of NAFTA. Mexico promoted changes to its Automotive Decrees, the phased-out its foreign ownership restrictions, and adopted a schedule to internalize US CAFE regulations. NAFTA also included both a higher regional content provision and new definitions of the rules of origin.557 In this sense, policy integration of the North American auto industry followed the production and distribution initiatives of the Big Three.558 These actors played an important role in the negotiations of the NAFTA and the Auto Pact seeking to augment their own position as insiders within the regional market and to make it more difficult for their competitors displace their position.
In Japan, the US made use of domestic legal instruments available to it to tackle structural barriers to the domestic distribution system within the Japanese market. The US wanted to dismantle the control Japanese automakers had over their dealers through equity, loans, rebates, transfers of personnel to dealerships as well as other forms of cooperation and technical support. In this sense, the concept of state, sovereignty and limits of action within the international system reflected off institutional arrangements and preferences in North
557 Id. at 29 558 GARY CLYDE HUFBAUER, NAFTA REVISITED: ACHIEVEMENTS AND CHALLENGES 366 (2005). page 152
America and, gradually, came to serve as parameters to the rest of the international community. In Korea, at least ten Section 301 cases had been initiated by 1998. The US formally requested changes on Korea’s tax regime, mortgage system, and type-approval procedure to enable "real market-opening concessions to resolve the Super 301 investigation.
In this context, Mexico, Korea, and Japan were faced with the fundamental contradiction of having to comply with United States’ standards to remain a partner or to be a part of NAFTA. Though arguably the policies incorporated may well have also been beneficial to them, the achievement of regulatory autonomy involved alienation from historical regulatory preferences through the internalization of preoccupations, tools and forms of administration that were interconnected with North America.559 This connection ultimately relates back to the de facto restricted policy space described in Chapter I. The lack of institutional neutrality embedded within the system ultimately meant that governing practices would come to reflect those practices of European and North American bureaucracies across the globe.
2. Institutional Preferences and Global Distributive Consequences
Referring back to Chapter I insofar as it illustrates the contingent nature of preferred measures for trade-related economic policies, the case of the Brazilian and US’ auto industry measures exemplify how countries’ measures fit in the spectrum of changing regulatory preferences. In context of the newly established World Trade Organization, the historical preference for price-based measures was reaffirmed with the Uruguay Rounds. A large number of industrial and export promotion policies became incompatible with the Agreements.
Specifically, policies employed to enhance savings and investment to promote technical change, competitiveness, and industrial development were not included in the WTO’s narrow conception of industrial policy. Nevertheless, a wide enough range of policies remained permissible under the Agreements so as not to affect greatly the development of the relatively more advanced of these countries. The net costs of the required changes in industrial policy under the Agreements were relatively small for the industrially more advanced developing countries, but quite large for the least developed countries. As a consequence, measures
559 Sinclair, supra note 239. page 153 regulated during the Uruguay Rounds were also indicative of the formation of a double-sided developmental regulatory space, varying with the structure of the industry in each country.
In Brazil, the early 1990s was marked by a second great migration of assembly companies, as followed by the first migratory wave described by Shapiro during the late fifties and early sixties.560 Given the low competitiveness of the Brazilian auto industry and the technological lag between domestically based companies and foreign manufacturers, the government sought to devise measures to bridge that gap. The main objective of these measures was to attract new car companies by enhancing the economic incentive to the large assembling plants in the country. With this move, the government hoped to encourage industrial modernization and technological upgrades to guarantee posterior access of Brazilian products to the international market. 561 Simply put, the measures attempted to promote industries in Brazil to a new point in the production value chain: holding more value-added activities, expertise, technology and design.
To do so, as described in Section A, the Brazilian government made use of measures such as investment incentives, export promotion measures, and quantitative restrictions. It authorized the entrance of import capital goods, inputs and vehicles with a reduction of the Import Tax and the Industrial Products Tax conditioned on commitments to invest in Brazil and to export.562 Though the program represented a move away from the developmental traditions of import substitution and Sectorial Chambers of the 1960s and 1970s, it kept traditional incentives to foster the development of its industries by shielding them from direct competition.
The “general program” of February 13, 1995 and the New Auto Regime were ultimately struck down by WTO rules. Ultimately, Brazil’s attempt to modernize its industry shifted power to assembly companies to influence fiscal and tax policy decisions, industrial structure, labor relations, and regional, and local development policies. In this sense, the measures the Brazilian government deemed appropriate for its auto industries were effectively neutralized by the trading system. First, regarding the type of measures needed for the specific modernization of the Brazilian auto industry. Second and, almost inevitably, how the program ended up constrained by the place Brazilian assemblers and supplier companies occupied in
560 SHAPIRO, supra note 285. 561 Vigevani & Veiga, supra note 282, at 330. 562 See Ações Setoriais para o Aumento da Competitividade da Indústria BrasiLawra. MDIC - Ministério do Desenvolvimento Indústria e Comércio. Available at: http://www.mdic.gov.br/spi/asac/asac0000.htm. page 154 global value chains. With the negotiating upper hand, foreign competitors managed to shape Brazilian policy according to their firm strategies, largely shifting the original regulatory intent of the New Auto Regime to respond to power relations between actors within a global value chain.
To the contrary, the example of the United States shows a different experience regarding the type of measures enacted and the regulatory freedom encountered. A key difference was intense articulation between US automakers and US federal and state governments. Concerns with industry competitiveness were dealt within the United States through the consistent use of public-private partnerships with the public sector matching investments of auto companies in the development of new technology. For instance, the advanced battery consortium and the “Supercar project” embraced neoliberal institutional arrangement in which government participation was enmeshed with the private sector. Additionally, the creation of clean fuel emissions standards regulations further created incentives for automotive and battery manufacturers, electric utilities, and DOE to jointly meet environmental goals.
Unlike the traditional Sectorial Chambers overlooking the Brazilian automotive sector in the 1960s and 1970s, the private-public partnerships in the US worked as a forum that provided major technology companies and automotive assemblers with common expertise and approximated their goals. For instance, the “Supercar” partnership between the Big Three, the Department of Commerce (DOC), Department of Transportation (DOT), Department of Energy (DOE), and the Department of Defense (DOD) worked to get new products quickly into the marketplace as well as to promote the use of new technologies by consumers, firms and foreign actors.
The strategic role of the State in promoting innovation, therefore, involved market-making and market-shaping through public finance.563 This state organizational model challenged clear-cut private and public roles in the development of technology and value-added activities within the auto-industries. Such technology would then be the exporter of technological activities within the production chain, shaping policy and priorities for actors (including countries) within the same value chain.
Last, the regulation of CAFE standards was also instrumentally used to shift the perspective of national content in vehicle to regional contents, namely, North American content. The
563 Mazzucato & Semieniuk, supra note 542. page 155 application of CAFE standards to Mexican vehicles possessing a determinate percentage of North-American input not only shifted the incentive of production in the region but also changed the public perception of the extents of the local automotive industry to beyond merely national borders.
Specifically, the CAFE standards were instrumental in creating room in the domestic market to allow the Big Three US producers to start manufacturing small fuel-efficient vehicles. By creating separate requirements for domestic and foreign producers under the CAFE “two fleet” rules, the use of regulatory standards operated to change the configuration of domestic production by the Big Three while shielding these new cars from growing international competition. Second, the inclusion of the production of assemblers based in Mexico to count towards Mexican value-added toward the CAFE standards was another coordinated strategy between the auto industry and the United States government to use fuel efficiency standards to further integrate the national auto industry markets in the region. Last, CAFE regulations were instrumental to create a perception of “domestic product” that referred to continentally produced goods after NAFTA.
3. Depoliticization of Trade Law and the Role of Experts
Trade experts play a fundamental role in sustaining, shaping, and justifying global economic relations (see Chapter I.B.3). Necessarily, speaking from an expert standpoint reproduces normative commitments embedded in the institutional, political, and economic preferences of the system. Abandoning expert vocabulary, however, comes at a price of losing authority and influence to rethink such commitments.564 This constant tension is present on the everyday workings of professionals in the many corners, moments, and actors of the trading system.
Trommer refers to “WTO speak” as the hundreds (thousands in general trade policy) of terms that guide dialogue in this field.565 Expressions such as “justifiable restrictions,” “unnecessary discrimination,” “appropriate level of protection,” “legitimate policy objectives” among many others commonly evoke the idea of “what is governing too much” under international trade rules.566 This underlying paradigm of the system, Sinclair argues, measures states policies against an economic rationale created and supported by a legal-
564 Silke Trommer, Trade Policy Communities, Expert Language, and the Dehumanization of World Trade, in EXPERT KNOWLEDGE IN GLOBAL TRADE 63, 65 (Erin Hannah et al., 2015). 565 Id. at 63. 566 Sinclair, supra note 239, at 447. page 156 rational governance logic that fixes the conception of what is “neutral,” “good,” or “bad” economic policy.
This linguistic tension gives meanings that are controlling of the discipline. This Chapter tells the story of how experts shape different levels of regulations and can potentially redefine a states’ realm of regulatory autonomy. In many moments, the US and Brazil case studies show how expertise influences who can do what in the system as well as who gets to be the authority in the system. Among these examples, the definition of appropriate trade-related balance of payment measures, the development of the “mandatory vs. discretionary” discussion at the WTO as well as the definition of legal concepts of “domestic industry” by the Big Three and the US government to influence what was regarded as sound economic policy.
The power of expertise first became obvious when trade diplomats were in charge of deciding what was a “critical situation” under paragraph 9 of Article XVIII of the GATT to decide whether the Brazilian balance of payment crisis merited the application of the imposed taxes. Since its GATT years, the WTO system has recognized the right of members to restrict imports to address balance-of-payments issues. Numerous countries have invoked this right over the years, and, therefore, trade experts have shaped the limits and possibilities of countries under this right for over 60 years.567 To understand the power of expertise in shaping this right, it is interesting to take a look at some moments from this trajectory.
In 1995, the time came to decide on the Brazilian balance of payment restrictions regarding its auto industry measures. The situation of the Brazilian balance-of-payments was put to deliberation among Members as to whether there was proportionality between the seriousness of the situation and the measure put in place. More specifically, countries were interested in whether the balance-of-payments situation in Brazil was a ‘critical situation’ that warranted the implementation of a measure such as the tax increase brought by Provisional Measure nº 1.024.568 As described above, Members ultimately defined what was a “critical situation” in balance of payments in the particular context of the Brazilian measure.
567 See also The Understanding and the Additional Articles to Article XVIII: B of the GAIT 1994, both part of the Marrakesh Agreement, supra note 250 (1979 Declaration on Trade Measures Taken for Balance-of- Payments Purposes, supra note 328; The Declaration on the Relationship of the World Trade Organization and the International Monetary Fund, WORLD TRADE ORG., https://www.wto.org/english/docs_e/legal_e/34- dimf_e.htm (last visited Oct. 16, 2019). 568 Report on the 1995 Consultation with Brazil, supra note 313. page 157
As it was the first time a measure had been justified under Article XVIII of the GATT, Members disagreed on how to interpret and apply that provision. While some members saw it as a long-standing problem faced by many Members that would imply permanent recourse to Article XVIII, which would then cease to be an exception. These countries argued that the state of the Brazilian balance-of-payments should be analyzed in context and as compared to those of many other developing countries. Different country cases were brought up in order to access the seriousness of the Brazilian situation and in order to conclude that Members in similar positions had not resorted to such measures and had not understood Article XVIII as a safeguard for such cases. Members also commented on the alternative measures including an IMF assessment to strengthen public finances recommending the tightening of national monetary policy, acceleration of structural reform and greater flexibility in the determination of the exchange rate.
Another similar example of how expertise worked to shape countries policies and therefore, the limits of the trading system in the early 1990s was seen on the mandatory vs. discretionary discussion at the heart of the US managed trade policy. The US managed trade policy initiatives were instrumental in supporting the auto industry in the US during the first years of the 1990s. These policies operated to sustain and support the domestic and regional auto sector through an era of increased influx of automotive goods from Asia and from Europe.
The proceedings and parties’ statements in this case are telling of the extent that expert findings over the case affected international trade and countries’ policy decisions around the globe. Korea, for instance, described being the third most frequent target of Section 301 actions, behind the European Union and Japan. As a result, equivalent trade sanctions have an impact on Korea's economy that is 13 times greater than their impact on the United States' economy.
In total, as of June 4, 1998, at least ten Section 301 cases had been initiated against Korea.569 On October 1, 1997, the USTR determined to designate Korea as Priority Foreign Country Practices, according to the Super 301 measure, and initiated on October 20, 1997, an investigation on Korean auto market. By October 1998, the US formally requested changes on Korea’s tax regime, mortgage system, and type-approval procedure to enable “real market
569 U.S. Sections 301-310, supra note 475 at para. 5.290. page 158 opening concessions to resolve the Super 301 investigation.”570 On October 20, 1998, Korea concluded MOU to improve market access of US and other foreign motor vehicles to the Korea market, and the USTR accordingly terminated the investigation.
For its turn, Cuba claimed that the provisions of the Foreign Trade Act of 1974 violate the principles of sovereign equality of States and of pacta sunt servanda, both central pillars of public international law.571 Especially in the case of the US, whereby national law has primacy over international law in cases where there is a conflict of provisions, the United States limited the complete fulfillment of the obligations entered into under international agreements. To Cuba, the Trade Act of 1974 contributes to “establishing a power-based policy in international economic relations, creating an atmosphere of insecurity and unpredictability.”572 Similarly, India contended that Sections 301-310 of the Trade Act of 1974 is both legally indefensible and morally unacceptable, understanding it to violate “all canons of International Law” and implying that “might is right and that the strong can prevail over the weak.”573
Importantly, India also noted that its long history of being subjected to Sections 301-310 of the Trade Act on grounds of alleged unfair trade practices has put pressure on it to conform to what the United States believes is “fair trading practices”.574 It argued that the determination of what constitutes “unfair trading practices” or “unreasonable acts” is done solely by United States with no objective criteria and is completely arbitrary. Even so, by forcing its trading partners to offer market access for American goods and services, all states become implicated and shaped in the arbitrary notion of what the United States considers to be “unfair trading practices.”575
Notwithstanding the US – Section 301-310 dispute, the US has not to this day repealed the pertinent provisions of the 1974 Trade Act. It still allows the United States Trade Representative (USTR) to investigate alleged violations of trade agreements by US trading partners, and sets forth a timeline for USTR to make determinations as to “whether the rights to which the United States is entitled under any trade agreement are being denied.” The Panel
570 Id. 571 Id. at para. 5.92 572 Id. at para. 5.98 573 Id. at para. 5.214 574 Id. at para. 5.215 575 Id. page 159 also established, according to US reassurances, that it would not exercise its discretion in a way that violated WTO Agreements were sufficient to eliminate the “presumptive violation.” The panel decision was not appealed. To date, the WTO Appellate Body has not offered a definitive rule regarding the permissibility of as such challenges. In this sense, the Panel’s decision on the so-called “mandatory/discretionary” doctrine in GATT/WTO law greatly impacted the WTO-legality of national trade laws, defining the extent to which “discretionary laws” were permissible and what economic room would that legal phrasing afford to WTO Members to implement their trade-related policies in the early 1990s.
A third example of how experts were key to define countries scope for domestic policy implementation was seen in the strategic use of legal definitions by the US auto companies and the US federal government. During the first years of the 1990s, the Big Three worked to redefine their domestic market and to maintain their insider status as domestic producers, creating a clear line between ‘domestically produced cars’ from imports. 576 The Big Three’s political actions worked to shape the perception of “who is us” in the American market as well as pressure on the government for policies that benefited the Big Three at the expense of foreign competitors.577
Among these initiatives, trade experts, lobby groups and trade professionals started a process to change the perception of the North American public and government to who exactly were the “outsiders” within the auto market. To do so, these firms sought to move assembly and parts production to North America, create strategic alliances with the insiders, export cars from the US to Japan, and invest in advertising and market that stressed their contribution to the local economy. They created labels, standards and slowly shaped the American Union of Auto Workers to include only American makers and push foreigner producers out of the market. These technical mechanisms effectively worked to
This move effectively transformed the automakers trade association into a more explicit nationalist lobbying arm representing only the Big Three.578 This political move was crucial to ensure that the industry would act in pursue of the same interests during this period of market opening across the globe with the establishment of the WTO and of NAFTA as well as to manage the increased competition threats coming from Asian producers.
576 Trommer, supra note 564, at 65. 577 Eden & Molot, supra note 428, at 501–542. 578 AT 504 page 160
These two instances of creative lobbying by the Big Three led to the establishment of an important political group to push its interests and to the approval of the ALAA as a significant piece of domestic regulation to further insulate them from international competition within the US market. The rebranding of the automotive sector in the US in the early 1990s, as exemplified by the two initiatives described above, is symbolic of how both the US government and the industry leaders sought to act together to offer alternative ways to insulate and to protect the domestic production in a way that would not be seen as open intervention in the sector or as protectionist measures.
III. CHAPTER 3: POLICY SPACE AND POST-CRISIS MEASURES FOR THE AUTO-INDUSTRY
A. The Case of Brazil
The Brazilian government has supported its auto industry since the industry’s earliest days: incentives date back to June 16, 1956.579 From the start, State policies directed at the country’s auto industry have rankled the country’s international trading partners and been the source of continuous complaints. Trading partners have raised complaints at the WTO virtually since the organization’s founding in 1995, and in reference to a wide array of measures of industrial development - from import substitution policies (ISI)580 to the INOVAR-AUTO regime (see Section 1 below).
The current case study focuses on the INOVAR-AUTO regime, the latest Brazilian automotive industrial plan to be challenged by the WTO. 581 The INOVAR-AUTO regime was different from previous tax incentives programs in two important ways. First, it created different tax categories for importers, assemblers and investors. In the past, tax benefits were differentiated by terms of origin. Second, the INOVAR-AUTO program redesigned the local content requirement of past auto industry regulations. The new regime established basic production processes (BPP) with phase-out requirements throughout the extent of the
579 A INDÚSTRIA DE 1950, ANFAVEA (2006). Available at: www.anfavea.com.br/50anos/94.pdf (accessed 18 June 2015). 580 Albert Fishlow, Origins and Consequences of Import Substitution in Brazil, in INTERNATIONAL ECONOMICS AND DEVELOPMENT: ESSAYS IN HONOR OF RAÚL PREBISCH 311 (Luis Eugenio di Marco ed., 1972); Werner Baer, Import Substitution and Industrialization in Latin America: Experiences and Interpretations, 7 LATIN AM. RES. REVIEW 95 (1972); Simon Teitel & Francisco E. Thoumi, From Import Substitution to Exports: The Manufacturing Exports Experience of Argentina and Brazil, 34 ECON. DEV. & CULTURAL CHANGE 455 (1986). 581 First Written Submission by the European Union, Brazil—Certain Measures Concerning Taxation and Charges, WT Doc. WT/DS472 (June 30, 2015), https://trade.ec.europa.eu/doclib/docs/2015/july/tradoc_153634.pdf.
page 161 program. This case study show that, despite the restrictions and condemnations emanating from the WTO regime, the government’s ability to implement its industrial policies to develop the domestic automotive industry was significantly curbed by other regulatory systems. Different layers of regulation and informal rules operated simultaneously affecting and shaping economic decisions of the government as well as the distributive consequences of its domestic policies.
In addition to the regulatory constraints imposed by the multilateral trading system, the case studies dissects forms of regulatory constraints imposed by domestic policies, regional agreements, corporate strategy, and GVCs and informal regulations. The findings in this Section show that policy space for industrial policy needs to be understood through a comprehensive analysis of the background norms and rules that shape a measure in its totality. As such, the criticism of international trade law as an impediment for regulatory autonomy needs to be taken with a grain of salt. Rather, it is but one (and in some cases, not the most significant) regulatory sphere among many others restricting government choices. A better understanding of how different countries experience such restrictions is crucial to understanding the distributive effects of the regulatory framework as a whole. This Section zooms into the automotive industry in Brazil to provide a concrete illustration on how regulatory autonomy played out in the case of the INOVAR-AUTO regime during the post- financial crisis period.
1. Post-Crisis Measures for the Auto Industry
The outbreak of the financial crisis in 2007 led to heavy losses in the Brazilian auto parts industry and in the vehicle assembly sector. Between July and November 2007 alone, domestic sales of light commercial vehicles fell by 49 percent.582 As most car companies around the world started experiencing a double-digit percentage decline in sales, business in Brazil faced a similar gloomy outlook. Attempting to swim against the current, the Brazilian government implemented two different sets of support measures for the automotive industry.
First, it created a package of favorable financing conditions for assemblers and new credit lines for auto part producers through the Brazilian National Development Bank (BNDES).583
582 Anuário Estatístico da Indústria Automobilística - Anfavea (2011). See LUCA RUBINI, THE DEFINITION OF SUBSIDY AND STATE AID: WTO AND EC LAW IN COMPARATIVE PERSPECTIVE (2009). 583 BRAZILIAN NAT’L DEV. BANK (BNDES), https://www.bndes.gov.br/wps/portal/site/home (last visited Oct. 16, 2019). page 162
It also established the “Programa de Sustentação de Investimento – PSI” (Program to Support Investment–PSI)584 to boost investment in assemblers and reduce the cost of equipment and machinery. Together, these programs sought to finance domestic production and domestic sales of auto parts and vehicles, enabling the financing, consortium or leasing of over 70 percent of the car market and 90 percent of truck and bus sales during the same period.585
Additionally, to foster internal vehicle sales over a longer period of time, the government established the first Industrialized Product Tax (IPI)586 reduction. The tax reduction was presented as a fundamental anti-cyclical policy to support the automotive industry587 and preserve economic balance.588 The reduced IPI rate was calculated on the basis of the vehicle’s motor power, type of fuel, place of production, and whether it was a local or an imported product.589 The government implemented the tax reduction from December 2008 until March 21, 2010 (hereinafter, the 2009-2010 Tax Measures).590
584 The Plan to Support Investment (Programa de Sustentação de Investimento – PSI) was established by Law No. 12.096, de 24 de November de 2009, D.O.U. de 25.11.2009, and renewed by Provisional Measure No. 663, de 19 December de 2014, D.O.U de 19.12.2014 (expired Dec. 31, 2015). 585 Daniel Barros & Luciana Silvestre Pedro, As Mudanças Estruturais do Setor Automotivo, os Impactos da Crise e as Perspectivas para o Brasil, BNDES SETORIAL, Sept. 2011, at 173, 192-193. 586 The IPI tax is a federal tax levied on most domestic and imported manufactured products. It is imposed at the point of sale by the manufacturer or processor in the case of domestically produced goods, and at the point of customs clearance in the case of imports. As part of the federal government’s efforts to support local producers, IPI rates between imported and domestically produced goods within the same product category may differ. The IPI tax is not considered a cost for the importer, since the value is credited back to the importer. Specifically, when the product is sold to the end user, the importer debits the IPI cost. The Government of Brazil levies the IPI rate by determining how essential the product may be for the Brazilian end-user. Generally, the IPI tax rate ranges from 0 percent to 15 percent. In the case of imports, the tax is charged on the product's CIF value plus import duty. A product’s IPI rate is directly proportional to its import tariff rate. See IPI - Imposto Sobre Produtos, RECEITA FEDERALMINISTÉRIO DA ECONOMIA, http://idg.receita.fazenda.gov.br/acesso- rapido/tributos/ipi (last visited Oct. 16, 2019). 587 Gustavo Alvarenga et al., Indústria Automobilística e Políticas Anticíclicas: Lições da Crise, RADAR: TECNOLOGIA, PRODUÇÃO E COMÉRCIO EXTERIOR, Apr. 2010, at 9; Fabrisia Franzoi, O Impacto da Redução do IPI do Veículos Automotores, em Virtude da Crise Financeira, REVISTA DIREITO, June 2012, http://www.revistadireito.unidavi.edu.br/edicoes-anteriores/revista-2-June- 2012/oimpactodareducaodoipidosveiculosautomotoresemvirtudedacrisefinanceira; Maria Freitas, Os Efeitos da Crise Global no Brasil: Aversão ao Risco e Preferência pela Liquidez no Mercado de Crédito, 23 ESTUDOS AVANÇADOS 125 (2009). 588 Provisional Measure No.451, de 15 de December de 2008, D.O.U. de 16.12.2008 (Braz.); Decree No. 6.707, de 23 de December de 2008, D.O.U. de 24/12/2008. 589 The five main changes in the IPI tax base took place were as follows: 1. Popular cars with up to 1000CC had the IPI Tax rate reduced from 7 percent to 0. 2. Cars with 1000CC to 2000CC had the IPI Tax rate reduced from 13 percent to 6,5 percent. 3. For cars consuming biofuels, the IPI Tax rate reduced from 11 percent to 5,5 percent. 4. There was no tax adjustment for vehicles with more than 2000CC. 5. Imported cars had the corresponding IPI tax base as compared to the like domestic vehicle. 590 See Redução de IPI estimulou 20,7 percent das vendas de veículos em 2009, R7 NOTÍCIAS (3 April 2009), Link www.noticias.r7.com/economia/noticias/reducao-de-ipi-estimulou-20-7-das-vendas-de-veiculos-em-2009- 20100428.html page 163
The auto sector responded quickly to the measures and domestic sales started to recover as early as March 2009.591 Combined, these measures allowed for a relatively rapid recovery of the automotive market.592 The year 2010 was marked by record market production, estimated at 77.6 million vehicles.593 The dynamic domestic market also accounted for similar production records in 2010 for light vehicles, trucks and buses. At that point in time, the Brazilian market surpassed Germany’s as the fourth biggest automotive market in the world.594
Figure 5: Timeline of Post-Crisis Policies for the Brazilian Auto-Industry
Favorable financing IPI Tax conditions, 2009- Reduction for 2011- Provisional IPI 2013- credt lines and Inovar-Auto 2008 Domestically Tax Scheme the Program to 2010 Produced Cars 2012 2017 Support Investment
In August 2011, the government publicized a second set of Brazilian auto industry policies— as comprehensive developmental plan for the Brazilian industry entitled “Plano Brasil Maior” (Greater Brazil Plan). The ambitious program operated as a public-private partnership, bringing together members of the National Industrial Development Council,595 the Sectorial
591 Gustavo Alvarenga et al., supra note 587, at 9. 592 GUSTAVO ALVARENGA ET AL., POLÍTICAS ANTICÍCLICAS NA INDÚSTRIA AUTOMOBILÍSTICA: UMA ANÁLISE DE COINTEGRAÇÃO DOS IMPACTOS DA REDUÇÃO DO IPI SOBRE AS VENDAS DE VEÍCULOS 20 (IPEA, Texto Para Discussão No. 1512, 2010), http://repositorio.ipea.gov.br/bitstream/11058/1372/1/TD_1512.pdf. 593 2011 Production Statistics, INT’L ORG. OF MOTOR VEHICLE MANUFACTURERS, http://www.oica.net/category/production-statistics/2011-statistics/ (last visited Oct. 15, 2019). 594 ANUÁRIO ESTATÍSTICO DA INDÚSTRIA AUTOMOBILÍSTICA, www.anfavea.com.br/anuario.html 595 Composed of ministers, the president of the National Development Bank as well as representatives of industry, labor, and the representatives of public society. See Brazil Maior, Ministry of Development, Industry and Commerce. http://www.brasilmaior.mdic.gov.br/images/data/201205/ac36870491379be10d85230b0a3bf526.pdf Accessed 15 October 2014. page 164
Executive Committees596 and the Sectorial Competitiveness Councils597 to devise strategies for the country’s auto sector. Overall, the partnership developed 35 initiatives for the Greater Brazil Plan structured under four strategic pillars: investment, innovation, foreign trade and market protection.
The Plan’s official slogan was “innovate to compete, compete to grow.”598 Through their initiatives, the Plan’s drafters reaffirmed “the vital state’s role […] in the formulation and implementation of strategies for industrial competitiveness”599 and effectively assumed the state’s role as strategic coordinator of the economy and the market.600 More specifically, the Plan aimed to “expand the investment rate from 18.4 percent to 22.4 percent of the Gross Domestic Product (GDP), increase private sector spending in research and development (R&D) from 0.59 percent to 0.9 percent of the GDP and increase Brazil’s share in world exports from 1.36 percent to 1.6 percent” by 2014. 601
To address the uncertainty in the automotive sector, the Greater Brazil Plan introduced a provisional tax scheme that would remain in place until December 31, 2012.602 At a time when Brazilian auto companies were facing great difficulties introducing their vehicles into the international market, the new tax regime attempted to reduce domestic production costs in order to increase the competitiveness of Brazilian vehicles and boost production and employment throughout the production chain. With the 2011-2012 Provisional Tax Scheme, the government instituted export- contingent tax breaks for the domestic industry and IPI tax exemptions based on investment, technological innovation and local content requirements.603 Manufacturers located in Brazil, MERCOSUR and Mexico would be able to benefit from the a 30 percent IPI tax exemption until December 31, 2012. 604
596 Composed of government representatives responsible for developing action plans for priority sectors. See id. 597 Constituted by representatives of government, industry and labor. The organ has the objective of refining action plans and implementation issues. See id. 598 See id. 599 See EM Interministeria No. 122, de 2 August de 2011; http://www.planalto.gov.br/ccivil_03/_ato2011- 2014/2011/Exm/EMI-122-MF-MCT-MDIC-Mpv540.htm 600 Luiz Carlos Bresser Pereira, From Old to New Developmentalism in Latin America, in HANDBOOK of LATIN AMERICA ECONOMICS 108 (José Antonio Ocampo & Jaime Ros eds., 2009). 601 See EM Interministeria No. 122, 2 August de 2011. 602 Available at: http://www.brasilmaior.mdic.gov.br/conteudo/125 (accessed 22 March 2014). 603 Provisional Measure No. 540, 2 August 2011, D.O.U. 3/8/2011; see also EM Interministeria No. 122, 2 August de 2011. 604 To accrue such benefits, they were required to: (1) Use a minimum of 65 percent locally-manufactured parts on average for each company (MERCOSUR-produced parts were considered national for the purposes of this provision); (2) Invest in innovation, research, and technological development incorporating national products totaling at least 0.5 percent of gross sale value of goods and services; (3) Develop within Brazil at least six of page 165
Less than two years after the 2011-2012 Provisional Tax Scheme was put in place, the government enacted another set of measures for the auto sector. Launched as the INOVAR- AUTO Regime (Program to Incentivize Technological Innovation and Strengthen the Automotive Vehicle Production Chain),605 the plan sought to refine the 2011-2012 Provisional Tax Scheme and establish a differentiated system of tax incentives for the automobile sector from October 3, 2012 to December 13, 2017.606
The INOVAR AUTO regime was a wide-ranging industrial policy plan. Its goal was to improve the quality of cars, trucks, buses and auto parts manufactured and traded in Brazil.607 To that end, the regime directed fiscal incentives toward endeavors that supported technological development and environmental protection through innovative know-how in automobile safety and energy efficiency. Overall, the regime attempted to close the technological gap between Brazilian-produced cars and imported cars.
According to the Brazilian government, the regime would strengthen the national automotive industry and bolster high-technology production in Brazil as well as increase the share of Brazilian technology employed in domestically produced vehicles.608 The then Finance Minister of Brazil, Guido Mantega, stated “the Brazilian domestic demand needs to be met by Brazilian producers and not by overseas producers.”609 Mantega argued that if import sales overtook domestic sales, the national industry would no longer grow and modernize. As such,
eleven production processes in Brazil as described by the legislation (4) Register with the Ministry of Industry, Development and International Trade (MDIC). See Law No. 11.196 5 November 2005, D.O.U. 22.11.2005; Law No. 9.826, 23 August 1999, D.O.U. 24.8.1999; Law No. 9.440, 14 March 1997, D.O.U. 15.3.1997. 605 Provisional Measure No. 563, 3 April 2012, D.O.U. 4.4.2012; Decree No. 7.716, 3 April 2012, D.O.U. 4.4.2012; see also Law No. 12.715, 17 September 2012, D.O.U 18.9.2012 (modified by Decree No. 7.819, 3 October 2012, D.O.U. 3/10/2012. [INOVAR-AUTO Decree]. 606 The INOVAR-AUTO Regime did not fully repeal all of the measures established by the 2011-2012 Provisional Tax Scheme; rather, it further developed these measures and created a new framework to direct the concession of tax breaks. For instance, Article 5(1)(II) of Law No. 12.546, 14 December 2011, D.O.U. 15.12.2011 [2011 Law], as amended, provides that the reduction of the IPI tax available to Brazilian manufacturers “may be granted until 31 December 2017. The 2011 Law deploys its effects under certain provisions of the regime that are otherwise currently applicable. 607 See Council for Trade in Goods Minutes of the Meeting of the Council for Trade in Goods, 26 November 2012, WTO Doc. G/C/M/112, (Mar. 5, 2013), https://docs.wto.org/dol2fe/Pages/FE_Search/ExportFile.aspx?id=115280&filename=q/G/C/M112.pdf . 608 Exposição de Motivos Interministerial No. 25, 2 April 2012, D.O.U. XX.XX.XXXX, paras. 44–45. - MF/MDIC/MCTI/MEC/MC/SEP/MS/MPS 609 AHORA ABCD Newspaper, Montadora que não Investir em Inovação e Conteúdo Nacional Pagará IPI Mais Alto 15/09/2011, YOUTUBE (Sept. 15, 2011), https://www.youtube.com/watch?v=F845tCF2zDE. page 166 the government “decided to take the strong, heavy measure to increase IPI by 30 percentage points.”610
The INOVAR-AUTO program differed from the 2008 – 2010 Tax Reduction and the 2011- 2012 Provisional Tax Scheme in two key ways. First, it conditioned presumed tax credits on the requirement that companies invest in more efficient and technologically advanced vehicles. It also instituted requirements for investments in national production, R&D,611 and automotive technology. Second, the INOVAR-AUTO regime created separate sets of conditions for domestic manufacturers, importers and investors to meet in order for them to benefit from the new tax regime.
There were three general conditions for participation in the INOVAR-AUTO regime: the applicant company had to offer proof of regular payment of its federal taxes; demonstrate a commitment to achieving minimum levels of energy efficiency; and show a demonstrated adherence to registration and labeling procedures with local authorities.612 Further, the regime provided specific conditions that were fundamental in determining the amount of presumed IPI tax credits (up to the maximum of a 30 percent rebate). The presumed IPI tax credits for domestic manufacturers, importers and investors was relative to their expenditure on research and development activities as well as investments in industrial technology, production engineering and capacity building of suppliers.613 In addition, automobiles consuming 15.46 percent less fuel than prior models would be entitled to a further IPI reduction of 1 percent and automobiles consuming 18.84 percent less would be eligible for a 2 percent IPI reduction.614 The conditions to qualify for the tax credits were different for domestic manufacturers, importers and investors.
610 TVBrasilGov, Mantega diz que Crescimento da Indústria BrasiLawra Virá com Aumento do IPI para Carros Importados, YOUTUBE (Nov. 24, 2011), https://www.youtube.com/watch?v=wi_itRqke5c. 611 For the purposes of the INOVAR-AUTO regime, Research & Development expenditures encompass investments that allow the development of innovative products, processes or systems through the following activities: (i) basic research; (ii) applied research; (iii) experimental development; and (iv) technical support services. See Replies to Questions from Australia and the European Union, Brazil—Tax Preferences to Domestically Manufactured Automotive Vehicles, WTO Doc. G/TRIMS/W/114 (Oct. 5, 2012). 612 See INOVAR-AUTO Decree, art. 4. 613 O INOVAR-AUTO 2013 – 2017 (2012), Ministry of Development, Industry and Commerce. Available at: www.desenvolvimento.gov.br/arquivos /dwnl_1349358617.ppt (accessed 22 March 2014). 614 The program maintained the lower pre-IPI tax rate for certain vehicles. See INOVAR-AUTO Decree, art. 21– 30. page 167
Table 1: Requirements for Domestic Manufacturers615
1. Undertake at least 80 percent of their production processes in the country;616 2. Undertake the minimum amount of manufacturing activities, infrastructure, and engineering;617 3. Meet at least two of the following requisites in Article 7 of the INOVAR-AUTO Decree; 4. Accomplish, locally, minimum outlays in Research and Development (R&D) corresponding to the company’s revenue; 5. Perform, locally, minimum outlays in engineering, industrial technology and capacitation of suppliers that correspond to a percentage of firm revenue; 6. Adhere to the program of energy efficiency and carbon emission labeling determined by the Ministry of Development, Industry and Trade (MDIC) and to be controlled by the National Institute of Metrology, Quality and Technology (INMETRO), with a percentage of products to adhere to the program of energy efficiency and carbon emission labeling per year until 2017; 7. Purchase “strategic inputs and tooling” to proportionally qualify for tax credit.
In order for the applicant company to comply with these requirements, the INOVAR-AUTO program stipulated the manufacturing steps as follows:618
Table 2: Manufacturing Steps for Domestic Producers
Passenger Cars and Light Lorries Chassis fitted with engine Commercial Vehicles
1. Molding 1. Molding 1. Welding
615 See INOVAR-AUTO Decree, art. 2. 616 Automakers need to conduct a minimum number of manufacturing and engineering infrastructure activities for at least 80 percent of the production of light-duty and light commercial vehicles in Brazil. The following activities meet program requirements: stamping, welding, anticorrosion treatment and painting, plastic injection, motor manufacturing, gearbox and transmission manufacturing, steering and suspension systems assembly, electrical systems assembly, axle and brake systems assembly, manufacturing or chassis assembly, assembly, final review and testing, own laboratory infrastructure for product development and testing. 617 Expenditures on engineering and basic industrial technology encompass several activities such as: engineering development; training of personnel on research, development of products and processes, innovation and implementation; development of products, including vehicles, systems and their components, auto parts, machinery and equipment; construction of laboratories of development of technologies in automotive safety; construction of laboratories of development of new technologies on the reduction of polluting gas emissions and environmental, climatic and sound controls; construction of laboratories of development of style and design; construction of laboratories for calibration and testing services; development of new industrial and quality control instruments and equipment. See generally Replies to Questions from Australia and the European Union, Brazil–Tax Preferences to Domestically Manufactured Automotive Vehicles, WTO Doc. G/TRIMS/W/114 (Oct. 5, 2012). 618 Manufacturing and Engineering Infrastructure Activities carried out in Brazil by the company or by third parties. INOVAR-AUTO Decree, Anexo III. page 168
2. Welding 2. Welding 2. Anti-corrosion treatment 3. Anti-corrosion treatment 3. Anti-corrosion treatment and and painting and painting painting 3. Plastic injection 4. Plastic injection 4. Plastic injection 4. Engine manufacture 5. Engine manufacture 5. Engine manufacture 5. Gearbox and transmission 6. Gearbox and transmission 6. Gearbox and transmission manufacture manufacture manufacture 6. Steering and suspension 7. Steering and suspension 7. Steering and suspension system manufacture system assembly system 7. Electrical system assembly 8. Electrical system assembly manufacture 8. Braking and axle systems 9. Braking and axle systems 8. Electrical system assembly Assembly assembly 9. Braking and axle systems 9. Assembly, final inspection 10. Manufacture of self- assembly and compatibility tests supporting 10. Assembly, final inspection 10. Chassis assembly body or assembly and compatible tests 11. Own laboratory of chassis 11. Chassis and bodywork infrastructure for product 11. Assembly, final inspection assembly development and testing and compatibility tests 12. Final assembly of cabins or 12. Own laboratory infrastructure bodywork; installation of acoustic for product and heat insulation, carpets and
development and testing619 finishing 13. Production of bodywork primarily from spare parts molded in the region 14. Own laboratory infrastructure for product development and testing
The minimum number of manufacturing steps required to be handled in Brazil per year under the INOVAR-AUTO increased each year from 2013 to 2017, as per the table below:620
619 For building laboratories, a covert local content requirement was inserted by Article 1(1)(V) of Portaria Interministerial MCTI/MDIC No. 772, de 12 de August de 2013, D.O.U. de 13.08.2013, as amended by Portaria No. 318, de 12 de June de 2014, D.O.U. de 13/06/2014. Similar provisions are also found in paragraphs (5)(V) and (5)(VI) of the amended Portaria, No. 318: “design, planning, construction or modernisation of laboratories and infrastructure for their operation, and acquisition of national equipment, services and spare parts needed to carry out the activities set out in this paragraph.” 620 See INOVAR- AUTO Decree, art. 7(I)(a)-(c). page 169
Table 3: Manufacturing Steps per Year
Passenger cars and Lorries Chassis fitted with Calendar Year light commercial engine vehicles 2013 6 8 5 2014 7 9 6 2015 7 9 6 2016 8 10 7 2017 8 10 7
Companies that imported automotive products to Brazil had to comply with the following requirements:621
Table 4: Requirements for Importers 622
1. Accomplish, locally, minimum outlays in Research and Development (R&D) corresponding to the company’s revenue; 2. Perform, locally, minimum outlays in engineering, industrial technology and capacitation of suppliers that correspond to a percentage of firm revenue; 3. Adhere to the program of energy efficiency and carbon emission labeling determined by the Ministry of Development, Industry and Trade (MDIC) and to be controlled by the National Institute of Metrology, Quality and Technology (INMETRO), with a percentage of products to be adhered to the program of energy efficiency and carbon emission labeling per year until 2017.
Finally, companies that invested in Brazil’s auto industry had to observe the following conditions:623
Table 5: Requirements for Investors624
1. Have pre-approved investment plans in Brazil by the Ministry of Development, Industry and Trade and provide technical descriptions of the vehicles to be imported and produced.
Importantly, according to Article 21 of the INOVAR-AUTO Decree, only domestic manufacturers or companies seeking to establish production facilities in Brazil (newcomers)
621 See INOVAR- AUTO Decree, art. 7. 622 See INOVAR- AUTO Decree, art. 7. 623 See INOVAR AUTO Decree, art. 2(I), art. 5, Anexo IV. 624 See INOVAR-AUTO Decree, art 2(I), art. 5, Anexo IV. page 170 would be able to sell motor vehicles at the fully-reduced IPI tax rate.625 In other words, importer companies could only obtain an accreditation under the INOVAR-AUTO regime as “companies that do not produce but commercialize vehicles in Brazil” and could not have access to the same presumed IPI tax credits available to assemblers and newcomers.626
To summarize these developments, INOVAR-AUTO redesigned the incentives for the automotive industry in three main ways. First, it enabled domestic manufacturers, importers and investors to benefit from a presumed IPI credit whereas the previous tax incentives had left no room for that possibility. By doing so, the regime attempted to afford special treatment not only to domestic producers, but also to different actors in the automotive market. Brazil argued that designing the policy this way created a less discriminatory regime, allowing companies from different places to work with Brazil towards a broader developmental goal and receive benefits in return.
Second, the INOVAR-AUTO regime instituted three different avenues for using this credit. It distinguished between (1) IPI credits linked to purchases of strategic inputs and tools;627 (2) IPI credits linked to R&D and other qualifying technological expenditures;628 and (3) IPI credits linked to the domestic sales of imported vehicles by accredited companies with an approved investment plan (newcomers).629
Third, as opposed to the previous policy (the 2011-2012 Provisional Tax Scheme), the INOVAR-AUTO regime redesigned its local content requirement provisions in such a way that the measures would be imposed on producers or on production steps, as opposed to products on the market. According to Brazil, this distinction is crucial to interpreting the scope of GATT Article III, TRIMS Article 2.1 and SCM article 3.1. INOVAR-AUTO, in this sense, affected only pre-market obligations regarding production and producers’ investment in research and development (R&D). 630 The new regime intended to be a pre-market,
625 It also extends to those originating in the other MERCOSUR members (Argentina, Paraguay, Uruguay, Venezuela) and in Mexico. 626 See INOVAR-AUTO Decree, art. 2(II). 627 See INOVAR- AUTO Decree, art. 14. Logically, for the first category, it is companies with manufacturing activities in Brazil that purchase parts and tools in Brazil, which would be able to benefit from tax offsets based on the purchase of the above-mentioned goods. Accredited companies with no production activities but only import and distribution operations will normally not make any expenditures in Brazil on automotive components, and do not therefore accrue IPI tax credits for items I (strategic inputs) and II (tools) of the list of qualifying expenditures. See First Written Submission by the European Union, supra note 581, at para. 229. 628 See INOVAR-AUTO Decree, art. 15. 629 See INOVAR-AUTO Decree, art. 16. 630 Panel Report, Brazil—Certain Measures Concerning Taxation and Charges, WT Doc. WT/DS472/R, at para. 7.61 [hereinafter Panel Report, Brazil - Taxation ]. page 171 producer-oriented incentive.
In terms of timing, the government implemented the program in a piecemeal fashion. Key ministerial regulations essential for the functioning of the program were issued irregularly over the period from 2011 to 2014. Whether intentional or not, this irregularity caused great uncertainty among all stakeholders in the auto sector, both domestic and international. For example, two years after the program’s initial implementation, the government finally issued order MDIC 257/2014 which defined key aspects of the meaning of “strategic inputs” as well as guidelines for the accreditation process and tracking system for domestic content for producers, importers, and investors.
2. International Rules
From the time that the measures outlined above began to take shape, they were the subjects of discussions at the WTO. From the 2008 – 2010 Tax Measures to the 2011-2012 Provisional Tax Scheme that preceded the INOVAR-AUTO regime, WTO members have viewed Brazil’s auto industry measures with concern. The WTO’s Committee on Market Access first discussed the 2011 Auto Regime in October 2011 and later in the three meetings of the Council for Trade in Goods held on November 2011, February 2012 and March 2012.631
Members expressed discomfort with the possible systemic implications of Brazil using a seemingly WTO-noncompliant measure as a “temporary” solution given how time- consuming a formal WTO dispute settlement could be.632 Several countries expressed the belief that Brazil’s measure was protectionist and that, in line with the commitments made as WTO Members, countries needed to tackle protectionism collectively.633 The European Union argued that even though Brazil had taken this measure in response to the surge of vehicle imports in 2011, this measure was not justifiable under WTO rules.634 Among others, Korea and Japan argued that the provisional tax regime contradicted Brazil's obligations under (1) the GATT national treatment principle; (2) the SCM Agreement; (3) the GATT Most-Favored Nation principle, and (4) the TRIMS Agreement.635
631 Questions from Australia and the European Union, Brazil – Tax Preferences to Domestically Manufactured Automotive Vehicles, WTO Doc. G/TRIMS/W/110 (Sept. 20, 2012). 632 Council for Trade in Goods, Minutes of the Meeting of the Council for Trade in Goods, 7 November 2011, WTO Doc. G/C/M/108 (Jan. 31, 2012) [hereinafter Council for Trade in Goods Nov. 7, 2011]. 633 Id. 634 Id. 635 Id. page 172
In response, Brazil argued that the measure was a temporary one, due to expire at the end of 2012. It claimed that the exceptional circumstances that led the country to modify its tax regime for the automotive sector could also have justified the adoption of trade remedies provided for in the WTO Agreement on SCM with a potentially higher trade-restrictive impact. Instead, Brazil had chosen to put in place positive incentives that were not protectionist in intent but rather aimed at promoting investment, innovation, and research and development in a key industry. These objectives were, in fact, the same ones that, right after the onset of the global financial crisis, led to massive governmental support to the auto industry in several key world markets. The auto industry had become the most heavily subsidized sector in the world economy; this was no secret.636
a. The Complaint Against Inovar Auto
Nevertheless, the longer timeline for the implementation of the INOVAR-AUTO program made the “temporary” justifications for the tax breaks harder to defend.637 Over successive TRIMs Committee and Market Access Committee meetings, Members questioned Brazil's recourse to indirect taxes as a means to protect and promote domestic manufacturing, particularly through domestic content requirements in the automotive sector.638 Members complained that these measures, announced as temporary, had now evolved into seemingly permanent use of indirect taxes to benefit a broader range of goods and sectors through domestic content requirements.639 Japan, Korea, United States, Australia, and the European Union argued vocally that the INOVAR-AUTO program failed to rectify the inconsistencies of the Provisional Tax Regime of 2011-2012. They claimed that the measures under the program were envisaged to protect domestic industry and would provide discriminated against foreign producers.
In December 2013, the European Union initiated proceedings under the WTO’s Dispute Settlement Understanding against Brazil concerning these automobile sector-related fiscal
636 Comm. for Market Access, Minutes of the Meeting Held on 14 October 2011, WTO Doc. G/MA/M/54 (Oct. 28, 2011); Council for Trade in Goods Nov. 7, 2011, supra note 632. 637 See Secretariat, Trade Policy Review, Brazil, WTO Doc. WT/TPR/M/283/Add.1 (May 17, 2013). 638 The EU had raised this issue at previous meetings of this Council, at the October 2012 meeting of the TRIMs Committee and at the meeting of the Committee on Market Access in October 2011. 639 Council for Trade in Goods, Minutes of The Meeting of the Council for Trade in Goods 9 April 2014, WTO Doc. G/C/M/118 (June 6, 2014). page 173 incentives, amongst other matters. 640 Argentina, 641 Japan, 642 and the US643 also joined this dispute as complainants. The European Union claimed that the measure was discriminatory insofar as the amount of the tax credit for “accredited” participating companies was dependent on the amount and the nature of each participant’s expenditures in Brazil. It argued that the most important variable to accrue tax credits were expenditures on “strategic inputs and tools” in Brazil. Therefore, distributors of imported vehicles with no manufacturing activities in Brazil could not earn any sizeable tax credit to offset the IPI tax on imported goods. The conditions relating to R&D and technological expenditures were also said to discriminate against imported goods.
The complainants argued that INOVAR-AUTO violated Article I:1 of the GATT 1994 given that motor vehicles originating in their countries were not accorded immediately and unconditionally the advantages granted to like products originating in certain other countries, i.e., Mexico and MERCOSUR countries. Second, they argued that the program breached Article III:2 of the GATT 1994, inasmuch as motor vehicles, automotive components, and tools imported into Brazil were accorded less favorable treatment than that accorded to like products of Brazilian origin, as a result of the conditions for accreditation to the program and the requirements for the earning and use of tax credits. Last, complainants claimed that there was a breach of Article III:5 insofar as the conditions relating to the minimum number of manufacturing activities in Brazil required a specific proportion of the final product to be from domestic sources.
They also claimed that Brazil had violated Article 2.1 of the TRIMS Agreement, in conjunction with Article 2.2 and with paragraph 1(a) of the Agreement’s Illustrative lists. Complainants understood the measure to be a trade-related investment measure that was inconsistent with Article III:4 of the GATT, given the use of strategic inputs and tools from Brazil over similar goods imported from other WTO Members. Last, they deemed the program to be incompatible with Articles 3.1 (b) and 3.2 of the SCM Agreement. The tax advantages were seen as subsidies within the meaning of article 1.1 of the SCM Agreement
640 Request for Consultation by the European Union, Brazil—Certain Measures Concerning Taxation and Charges, WTO Doc. WT/DS472/1 (Jan. 8, 2014). 641 Request to Join Consultations from Argentina, Brazil—Certain Measures Concerning Taxation and Charges, WTO Doc. WT/DS472/3 (Jan. 20, 2014). 642 Request to Join Consultations from Japan, Brazil—Certain Measures Concerning Taxation and Charges, WTO Doc. WT/DS472/2 (Jan. 17, 2014). 643 Request to Join Consultations from the United States, Brazil—Certain Measures Concerning Taxation and Charges, WTO Doc. WT/DS472/4 (Jan. 21, 2014). page 174 and deemed to be contingent upon the use of strategic inputs and tools from Brazil over similar good imported from other WTO members.
Brazil responded to these claims by pointing out that its tax system was complex and that it often, unintentionally, over-taxed investments. This over-taxation was mainly due to producers having to pay certain taxes along the chain of production and receiving tax credits to be used at the end of the production chain with the final products. From a fiscal standpoint, Brazil argued, the measures were neutral as they displaced a credit along the value chain.644 As such, the new measures were conceived to change this structural anomaly and to bring the Brazilian tax system to international norms.
Brazil stated that these measures also provided level conditions to producers who were committed to energy efficiency and sustainable development, reducing costs throughout the production chain in sectors with generally high upfront costs. Within the boundaries of the WTO Agreements, Brazil argued that Members could and, and did, regulate production steps in for their domestic industrial bases. This was not only a regulatory possibility under trade rules but also a developmental requirement for technology-intensive sectors. Industries such as automotive and telecommunications require significant expertise in the various steps of the production process and provision of services, Brazil submitted. In essence, Brazil argued that WTO Members have the discretion to determine how each production step described by the INOVAR-AUTO legislation (See Table 2: Manufacturing Steps for Domestic Producers) will operate in different stages of their internal production chain. Brazil submitted two general defenses for the INOVAR-AUTO program.645 First, it argued that
“Article III of the GATT 1994 did not apply to the challenged measures because the disciplines of Article III govern discrimination on products, whereas the challenged programs are not product-related but rather impose process and production-step requirements. Similarly, the disciplines of Article 2 of the TRIMs Agreement and Article 3 of the SCM Agreement relate to products, and are therefore equally inapplicable to the measures at issue.”646
Brazil asserted that the Ad Note to Article XVII of the GATT 1994 explains that the term “goods” are to be understood as “products in commercial practice,” excluding production step requirements, research and development (R&D) requirements or development
644 Comm. on Trade-Related Investment Measures, Minutes of the Meeting Held on 30 April 2013, WTO Doc. G/TRIMS/M/34 (Apr. 30, 2013) [Hereinafter April 30th Meeting]. 645 Panel Report, Brazil - Taxation , supra at note 630, at para. 7.52– 7.60. 646 Id. at para. 7.58. page 175 requirements.647 Brazil also argued that the Appellate Body has distinguished between goods in the market, and production, in the subsidies context. According to Brazil, since the measures “are related to pre-market conditions that do not fall under the purview of Article III, they do not affect imported products in a manner inconsistent with Article III.”648 Second, it claimed that the challenged measures constituted
“payments of subsidies exclusively to domestic producers within the meaning of Article III:8(b) of the GATT 1994, and, therefore are exempted from the disciplines of paragraphs 2, 4 and 5 of Article III of the GATT 1994. In Brazil's view, this would also exclude the challenged programmes from the scope of Article 2 of the TRIMs Agreement. According to Brazil, the disciplines in Article III:2, III:4 and III:5 of GATT 1994 are not applicable to the challenged programmes and therefore the Panel need not consider whether such challenged programmes are inconsistent with Article III:2, III:4 and III:5 of GATT 1994, or other related and overlapping prohibitions included in Article 2 of the TRIMs Agreement and Article 3.1(b) of the SCM Agreement.”
Brazil thus stated that the measures were fully consistent with the WTO Agreements, as nothing in the WTO Agreements should be read as prohibiting a Member from establishing conditions or defining levels of production or technology in a certain territory or from defining levels of production or of technology thereupon. Specific requirements related to the location of certain production processes did not imply that domestic goods would be favored over imported goods.649 Further, deciding that this measure would constitute a prioritization of local content goods over imported ones would be similar to recognizing that Members do not have discretion in determining production steps in different parts of their production chain. If so, Members’ development policy would be significantly curtailed, relegated only to the final assembly of the final good.650
The Panel found that certain aspects of INOVAR-AUTO’s accreditation process, the system of rules on accrual and calculation of presumed tax credits, and the rules on the use of presumed tax credits resulting from expenditure on strategic inputs and tools in Brazil, resulted in inconsistencies with Article III:2 and Article III:4 of the GATT 1994; Article 2.1 of the TRIMs Agreement as well as Article 3.1(b) and 3.2 of the SCM Agreement.651 The
647 First Written Submission by the European Union, supra note 581, at para. 57, 194, 241 (referring in part to the Appellate Body Report, EC – Large Civil Aircraft, para. 1054). 648 First Written Submission by the European Union, supra note 581, at para. 184, 143. 649 Replies to Follow-Up on Questions Posed by the United States Regarding the New and Full Notification of Brazil, Committee on Subsidies and Countervailing Measures, Subsidies, WTO Doc. G/SCM/Q2/BRA/48 (Apr. 11, 2016). 650 April 30th Meeting, supra note 644. 651 Panel Report, Brazil - Taxation, supra at note 630, at para. 8.6. page 176
Appellate Body upheld the Panel’s findings and confirmed that the internal tax reductions accorded under INOVAR-AUTO to imported products from Argentina, Mexico, and Uruguay were also inconsistent with GATT Article I:1 are not justified under the Enabling Clause.652
b. Regional Structures and Changes to the Brazilian Regime
The WTO does not represent the entirety of regulations that impinge on countries’ regulatory space. Another important source of structural constraints in the international economic system is the plethora of agreements that regulate trade regionally and bilaterally. Free trade agreements, custom unions, and regional preferential agreements also compel countries’ regulatory options, either deepening the multilateral liberalization process or, alternatively, offering different narratives to the stories and methods used within the GATT/WTO system. One way or another, regional and bilateral trade agreements converse with the WTO regime, either internalizing many of its paradigms or by denying them. This relationship, therefore, informs countries’ understandings of economic governance and operates as a yardstick to measure economic policies.
As a MERCOSUR (Southern Common Market) Member, Brazil responds to a broad range of free trade agreements that aim to foster a deeper regional market and integrate the production chains within the countries of the region. Under the MERCOSUR umbrella, there are Economic Complementation Agreements (ACE) that regulate specific relationships within MERCOSUR Members as well as between MERCOSUR and non-MERCOSUR countries. Second, MERCOSUR Members subscribe to a customs union, the Common External Tariff, in force since January 1, 2006. Last, the agreements under MERCOSUR are also within the framework of the broader group of countries known as The Latin American Integration Association (LAIA)653 and vary from regional tariff preferences to regional scope agreements and partial scope agreements.
Under this framework, the INOVAR-AUTO program translated into a different program for producers, investors and importers from these regional trading partners. After negotiations
652 Appellate Body Panel Report, Brazil—Certain Measures Concerning Taxation and Charges, WT Doc. WT/DS472/AB/R, at para. 5.427. 653 Treaty of Montevideo Instrument Establishing the Latin American Integration Association, Aug. 12, 1980, 20 I.L.M. 672. page 177 with Mexico, Argentina and Uruguay, the Brazilian government adapted its INOVAR-AUTO program to reflect regional accords and commitments. It did so in three main different ways.
First, because Brazil had signed a partial scope ACE agreement with Mexico on July 2002,654 it had already established free trade in the automotive sector with MERCOSUR and Mexico for a transition period lasting up to June 30, 2011, and renegotiated in 2013. As such, Brazil granted these trading partners a first carve-out on their desired policies in the INOVAR- AUTO regime. Second, the Brazilian government repeatedly negotiated with Argentina to lower the flex ratio655 for trade flows between the two countries to balance both countries’ vehicle and auto parts markets. Third, the Brazilian government established a new agreement with Uruguay whereby Uruguay would benefit from the INOVAR-AUTO program with very few exceptions and, in some cases, even without the need to be formally accredited by the Brazilian Ministry of Commerce.
First, Brazil adapted the INOVAR AUTO program to Mexico and Mexican stakeholders, building on an earlier agreement. Specifically, Brazil sought to renegotiate the Fourth Additional Protocol to Appendix II of the Agreement on Economic Complementation n° 55, which the two countries originally signed in 2002.656 Brazil had a constant trade deficit in light vehicles with Mexico, 657 and sought to negotiate quantitative restrictions to limit the number of vehicles that could benefit from tariff preferences set by the INOVAR-AUTO regime. The negotiations concluded on March 15, 2012, setting yearly import quotas ranging from US$ 1.45 billion to US$ 1.64 billion during the first three years of the program.658
As a parallel development, INOVAR-AUTO regime also redesigned the formula for calculating the index of local content in vehicles sold and purchased between Brazil and Mexico. Under the new scheme, Brazil laid out progressively higher local content
654 Acuerdo de Complementación Económica N° 54 celebrado entre los Estados Unidos Mexicanos y los Estados Partes del Mercado Común del Sur (MERCOSUR). Available at: www.sice.oas.org/Trade/MERCOSURMexACE54/MERMex_s.asp (accessed 17 July 2017). 655 Martín Obaya, Multinational Companies and the Peripheral Automotive Space in MERCOSUR, in Regional Integration and Modernity: Cross-Atlantic Perspectives 183, 189 (Natalie J. Doyle & Lorenza Sebesta eds., 2014). 656 See Decree No. 7.706 (regarding new rules for bilateral trade of light vehicles between Mexico and Brazil, as established by the Fourth Additional Protocol to the Appendix II of the Agreement on Economic Complementation n° 55 (ACE n° 55). 657 Valor Online, Brasil Define Cota de Exportação para o México, AUTOMOTIVE BUS. (Mar. 4, 2012), http://www.automotivebusiness.com.br/noticia/13606/brasil-define-cota-de-exportacao-para-o-mexico. 658 Da Agência Brasil, Brasil e México Fecham Novo Acordo Automotivo, EBC NEWS (Mar. 15, 2012), http://memoria.ebc.com.br/agenciabrasil/noticia/2012-03-15/brasil-e-mexico-fecham-novo-acordo-automotivo. page 178 requirements: local content level would start at 30 percent beginning March 30, 2012; 35 percent from March 2013; and 40 percent from March 2016. Thus, bilateral trade negotiations between Brazil and Mexico provided for specific quotas under which Mexico could export vehicles to Brazil under more favorable rules of domestic taxation (presumed IPI tax credits by 30 percentage points).659 Second, Brazil also initiated a lengthy process of negotiations with the Argentine government. Much like Brazil’s Economic Complementation Agreement with Mexico, the Argentinean Economic Complementation Agreement n° 14 did not involve internal taxation issues.660 After the Agreement struck with Mexico, Brazil decided to extend the 30- percentage point presumed IPI tax credits to vehicles imported from Argentina under the "flex" regime. As such, though ACE n°14 between Argentina and Brazil did not establish a mechanism of tariff quotas similar to Mexico’s, it did provide for a flex coefficient for the balance of trade flows between both countries.
The flex coefficient was adopted in ACE n° 14 to regulate the volume of automotive trade flows between Argentina and Brazil. The flex quotas tried to achieve a trade balance between the two sectors of these economies by calculating the variation coefficient on total annual exports, that is, the relationship between the imports and exports of each country. The two countries first implemented this arrangement in 2002 by signing the 31st Additional Protocol to the Agreement on Economic Complementation n° 14661 , which established the flex ratio at 1.6. This would mean that if Argentine vehicle exports to Brazil were valued at US$ 1 billion, then Brazil would be able to export to Argentina a maximum of US$1.6 billion tariff-free vehicles. This agreement further established a flexible scheme to gradually increase the flex ratio between the two countries to 2.6 in 2005.
In 2006, the first attempt to implement a free trade area between both countries failed, and they designed and implemented a new flex ratio to regulate the relationship between their auto sectors.662 Ideally, the plan was for the new ratio to remain in place until a free trade area could be implemented in both countries through the 38º Additional Protocol to the Agreement on Economic Complementation n°14 (ACE n°14). Put into place from July 1, 2008 through
659 See INOVAR-AUTO Decree, art. 21. 660 See Decree No. 6.500, de 2 de July de 2008, D.O.U. de 3.7.2008 (Braz.), http://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2008/Decree/D6500.htm. 661 This arrangement was first implemented in 2002 with the signing of the 31st Additional Protocol to the Agreement on Economic Complementation n° 14. 662 See Decree No. 4.510, de 11 de November de 2002, D.O.U. de 12.12.2002 (Braz.) (referring to the 31st Additional Protocol to the Agreement of Economic Complementation n° 14, between Brazil and Argentina). page 179
June 30, 2014, the Protocol established that, from June 30, 2013, the flex system would be extinguished and free trade flows would be normalized between the two countries’ sectors. Nevertheless, because of intense pressure from the Argentinean auto parts sector on their government, Brazil and Argentina once again postponed the free trade project for fear of worsening the Argentinean trade deficit with Brazil in the auto parts sector. The negotiation process was strenuous not only because the overall trade imbalance favored Brazil but also because the automotive sector represented such an important share of trade for MERCOSUR.663
To make the situation even more delicate, a series of tit-for-tat actions were affecting the relationship between the two countries. For instance, Argentina imposed informal barriers to Brazil’s exports in 2012 while Brazil included Argentinean vehicles in a list of goods that required import licenses.664 In this context, Brazil and Argentina decided to extend the validity of their Agreement on Economic Complementation to the extent that it regulated the trade proportionality between both countries’ automotive systems through the flex ratios. The agreement, originally due to expire on June 30, 2014, was extended until June 2015 and the flex coefficient for tariff-free exportation between the countries was reduced from 1.95 to 1.5.665
Table 6: Positions of Brazil-Argentina Stakeholders regarding the INOVAR- AUTO Regime
Brazilian Brazilian Auto- Argentinean Argentinean Assemblers Parts Industry Assemblers Auto-Parts Industry Key Concern The increasing The increasing Possible impact Possible impact importation of importation of INOVAR-AUTO INOVAR-AUTO vehicles from auto-parts for may have on may have on outside assemblers and domestic domestic MERCOSUR growing production production since 2005 commercial deficit processes, processes with the specialization and loss of investment complementary
663 Medidas Comerciais e de Estímulo para Carros, Informática e Turismo, CARTA MENSAL INTAL 194 (Sept. 30, 2012), https://issuu.com/idb_publications/docs/_pt_80882. 664 Eugênio Augusto Brito, Importadores Defendem Restrição do Governo em Aliança Informal Contra Anfavea, UOL CARROS (May 18, 2011), http://carros.uol.com.br/noticias/redacao/2011/05/18/importadores-e- governo-fazem-alianca-informal-contra-anfavea.htm; Brasil Barra Entrada de 40 Mil Automóveis da Argentina nas Alfândegas, PARAÍBA (July 14, 2011), www.paraiba.com.br/2011/07/14/23921-brasil-barra-entrada-de-40-mil-automoveis-da-argentina-nas- alfandegas. http://www.automotivebusiness.com.br/noticia/11012/produtos-da-argentina-e-do-brasil-sao- barrados-nas-alfandegas. 665 Acuerdo Automotor con Brasil: Qué Ganó y Qué Perdió Argentina, AUTOBLOG (June 11, 2014), www.autoblog.com.ar/2014/06/11/argentina-y-brasil-prorrogaron-acuerdo-automotor-por-un-ano. page 180
production and of exports to processes with the Brazil Brazilian auto- sector Position towards In agreement with Recognized the Some of the Some of the INOVAR-AUTO the implementation benefits of the associated associated of INOVAR- program, but assemblers assemblers AUTO; helped to expected it would expressed expressed support negotiate and mainly affect willingness to for the idea of shape the investment in extend INOVAR- adapting processes legislation assembly plants; AUTO to to the advocated for an Argentina characteristics of INOVAR-PECAS the Argentinean program, focused Industry on the auto-parts industry Action Areas The INOVAR- Advocated for Advocated for the Considered the AUTO regime was changes in the way necessity of measure for local sponsored by of measuring local including content used in traditional local content and MERCOSUR with Protocol XXXVIII assemblers traceability the criteria for of the ACE 14 to requirements local activities and be insufficient. processes Saw the adaptation of the INOVAR- AUTO regime to Argentina as an alternative Expectations Increased Establishment of Inclusion of other Advocated for the investments in INOVAR-PECAS forms of subsidies government to assemblers, growth given to the adapt INOVAR- in production and Brazilian auto AUTO to the exportations industry in the country and that negotiations with the Brazilian Argentina legislators would consider Argentinean industrial processes for the purposes of the INOVAR-AUTO regime Commentary by Clodomiro Belini Elias Mufarrej Stakeholders (ex President of (Counsel at ANFAVEA): “We Sindipeças): “In believe that the reality, INOVAR- INOVAR-AUTO AUTO is a project regime was a great created to achievement and incentivize foreign group work, assemblers to undertaken by invest in Brazil. companies that Within this goal, a compete in the nationalization market among index was created. themselves” This is the only benefit that the project brings to the auto-parts industry – the incentive (through page 181
tax offset) for domestic assemblers to buy local auto – parts instead of importing them.”
Source: Diego Figueroa, Luis Katz et al. “El Futuro Del Sector Automotriz en Argentina y el Mercosur: Análisis del Programa Inovar-Auto e Inovar -Peças de Brasil,” 1a ed. - Buenos Aires : Ministerio de Ciencia, Tecnología e Innovación Productiva, 2014. E-Book. Available at: www.mincyt.gob.ar/adjuntos/archivos/000/046/0000046962.pdf (accessed 20 September 2016).
Third and last, Brazil awarded Uruguay a special provision under the INOVAR-AUTO Decree to create more favorable conditions for trading with Brazil. According to Article 22 of the INOVAR-AUTO Decree, vehicles imported under the 68th and 69th Additional Protocol to the Economic Complementation Agreement n° 2666, the Agreement between Brazil and Uruguay, did not need to fulfill any other conditions other than the “requirements, limits or quantitative restrictions” set out in Agreement on Economic Complementation.667
Furthermore, although the Economic Complementation Agreement n° 2 did not cover matters of internal taxation, Brazil chose not to apply the 30 percentage point IPI tax surcharge to vehicles imported from Uruguay under the zero-rate tariff measure. Rather, Brazil and Uruguay established a differentiated system of tariff-free quotas. The tariff-quotas vary according to the level of regional content in the vehicles: there are no quantitative limitations if the vehicles meet a regional content threshold of 60 percent. If the proportion of regional content falls between 50 percent and 60 percent, then some quantitative limits apply.668
As such, with regard to imports from Argentina, Uruguay, and Mexico, the INOVAR-AUTO Decree offered a favorable domestic taxation regime, offering presumed IPI tax credits by 30 percentage points to the extent that individual tariff quota arrangements were allowed for each country. For imports from these countries that were not covered by the terms of the Montevideo Agreement (which established the MERCOSUR) or the individual Agreements
666 See Decree No. 88.419, de 20 de June de 1983, D.O.U. 22.6.1983, http://www.desenvolvimento.gov.br/arquivos/dwnl_1196879391.pdf (approving the Agreement on Economic Complementation No. 2); see also Decree No. 7.658, de 23 de December de 2011, D.O.U. 26.12.2011, http://www.planalto.gov.br/ccivil_03/_ato2011-2014/2011/Decree/D7658.htm (approving the 69th Additional Protocol to the Agreement on Economic Complementation No. 2 between Brazil and Uruguay, 24 August 2011); Decree No. 6.518, de 30 de July de 2008, D.O.U. de 31.7.2008, http://www.planalto.gov.br/ccivil_03/_Ato2007-2010/2008/Decree/D6518.htm (approving the 68th Additional Protocol to the Agreement on Economic Complementation No. 2 between Brazil and Uruguay, 24 August 2011). 667 See INOVAR-AUTO Decree, art. 22(1)(II). 668 See art. 5(b), 11, 15 of the Agreement on Economic Complementation n° 2 between the Federative Republic of Brazil and the Republic of Uruguay. page 182 on Economic Complementation, the internal tax benefit provided by the INOVAR-AUTO Decree was not limited by any quantitative quotas.
The negotiations conducted within MERCOSUR centered on the same concerns later presented by WTO members and led to significant exceptions to the application of the INOVAR-AUTO regime as it applied to these countries. The three main carve-outs that these countries negotiated impacted the potential benefits the regime could bring to the Brazilian industry. Instead, the carve-outs were incorporated into the INOVAR-AUTO development strategy and attempt to structure and strengthen different parts of the production chain within the region. In this sense, regulatory policy space took on a regional perspective: Brazil attempted to create a regional industry through a coordinated developmental strategy.
3. Domestic Rules
The path to establishing the INOVAR-AUTO regime was weighed down by several domestic obstacles. The increasing number of foreign car imports in the second half of 2010 and first half of 2011 (an increase of 35 percent in one year alone during only that period)669 prompted the Brazilian Government to opt for a quick counteraction to protect the domestic market rather than adopt a more moderate, long-term plan for the industry. Spurred on with this sense of urgency, in September 2011 the Brazilian government implemented the 2011 - 2012 IPI Tax Hike for foreign vehicles through Decree nº 7.567/2011. This Decree increased the IPI tax rate for imported vehicles by 30 percent and required that manufacturers use 65 percent domestic content to benefit from the lower – unaltered – IPI tax rate.
As soon as the government implemented this quick-fix tax hike solution to the crisis, it encountered strong domestic pushback and was forced to maneuver around internal limitations to implement it. First, the implementation dates for the tax hike posed a problem. The government was unable to effectively implement the hike in the desired timeline due to constitutional holding periods. Second, it had to allow for carve-outs for individual assemblers that sought judicial injunctions to counter the effects of the tax hike.
a. Defining “Harm” in Brazilian Constitutional Law
The first legal struggle involving the IPI tax plan erupted almost immediately after the publication of Decree nº 7.567/2011: the DEM Party (Democrats) filed a complaint with the
669 Filipe Guerra Jácome, Implication of the New Amendment to the Tax Rate to Processed Car Products 2 CADERNOS DA ESCOLA DE DIREITO E RELAÇÕES INTERNACIONAIS 239, 295 (2011). page 183
Supreme Court arguing that Article 16 of the Decree was unconstitutional. They claimed that the immediate implementation of the tax break was not in accordance with the holding periods for extra levies set out in the Brazilian Constitution.670 The DEM Party also mobilized representatives in the Lower House to present a Project of a Legislative Decree671 to suspend the effects of Decree nº 7.567/2011.672 The [Lower House], however, voted to reject the Project for Legislative Decree and later archived it, noting that the Decree posed serious “long term risks for the Brazilian auto industry that may arise from the surge of Asian imports.”673
Following the lines argued by the DEM Party, the Chinese assembler Chevy Motors, represented by the Venko Motors group, filed a claim in the state of Espírito Santo alleging that the Decree’s tax increases were unconstitutional given that the Decree did not respect the required 90-day holding period established by Article 150 of the 1988 Brazilian Federal Constitution.674 The Brazilian Government, for its part, maintained that, in cases where there is “grave harm to the public order and economy,”675 the required 90-day holding period does not need to be respected.
The Federal government alleged that the IPI tax was a regulatory instrument to be used as a response to national and international economic events that would come to harm the industry. Though the constitutional article 150 established a 90-day holding period, the government argued that Article 153, IV, § 1º of the Brazilian Constitution it delegated competence to the
670 See Pedido de Medida Cautelar, Ação Direta de Inconstitucionalidade 4661. ADI 4661 MC/DF, rel. Min. Marco Aurélio, 20.10.2011. (ADI-4661). Available at: www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=4661&classe=ADI&origem=AP&recurso= 0&tipoJulgamento=M (accessed 20 July 2016). 671 See Projeto de Decree Legislativo (PDC) 439/11. Available at: http://www2.camara.leg.br/camaranoticias/noticias/ECONOMIA/203016-PROJETO-SUSTA-AUMENTO-DE- IPI-DE-CARROS-IMPORTADOS.html (accessed 20 July 2016). 672 See "DEM tenta revogar Decree que aumentou IPI de carros importados," CÂMARA NOTÍCIAS, 22 September 22. Available at: www2.camara.leg.br/camaranoticias/noticias/ECONOMIA/203011-DEM-TENTA- REVOGAR-DECREE-QUE-AUMENTOU-IPI-DE-CARROS-IMPORTADOS.html (accessed 20 July 2016). 673 See Omissão de Desenvolvimento Econômico, Indústria e Comércio, Projeto de Decree Legislativo nº 439. Available at: www.camara.gov.br/proposicoesWeb/prop_mostrarintegra?codteor=989696&filename=Tramitacao- PRL+1+CDEICS+ percent3D>+PDC+439/2011 (accessed 20 June 2016). 674 See Processo: Nº 0012698-60.2011.4.02.0000 (TRF2 2011.02.01.012698-8) XXI - SUSPENSAO DE LIMINAR ( SL /1350 ) - AUTUADO EM 22.09.2011 PROC. ORIGINÁRIO Nº 201150010110798 JUSTIÇA FEDERAL VITORIA VARA: 1CI. Available at: www.trf2.jus.br/ (accessed 20 June 2016). 675 Freely translated from Portuguese: “art. 4º, caput, e § 1º, da Law nº 8.437/92: “Art. 4º Compete ao presidente do tribunal, ao qual couber o conhecimento do respectivo recurso, suspender, em despacho fundamentado, a execução da liminar nas ações movidas contra o Poder Público ou seus agentes, a requerimento do Ministério Público ou da pessoa jurídica de direito público interessada, em caso de manifesto interesse público ou de flagrante ilegitimidade, e para evitar grave lesão à ordem, à saúde, à segurança e à economia públicas.” page 184
Executive to change the IPI tax rates established by law through executive Decrees. According to the attorney general at the time, Luís Inácio Adams, Decree-Law 1.191/1971 authorized the Executive Power to reduce tax rates or increase them up to 30 percent. The Decree was meant to be implemented in situations when Brazil needed to reach goals of regulatory economic policy, maintain product selectivity, or correct market distortions.676 According to the government, the country faced “concrete harm to the Brazilian public order and economy” because, in the period from January to August of 2011, the trade imbalance in the automotive sector had mushroomed into a R$3 billion deficit (approximately U$1 billion).677
The sudden deficit resulted from the fact that, in a short period from August to September of 2011, the sale of imported vehicles in the country had grown by 3 percent, the equivalent of all growth registered during 2010. Adams argued that the percentage of imported vehicles in Brazil had increased from 4.7 percent in 2005 to a whopping 23.52 percent in 2011 due to a surge of imported Asian vehicles. He observed that this import surge was leading to the denationalization of the Brazilian industry, which could cause “grave harm to the public order.”
Ultimately, in its decision of October 20, 2011, the Brazilian Supreme Court granted Chevy Motors an injunction for a period of 90 days, exempting it from the measures implemented by the Decree from September 16 to December 15, 2011. Despite the government’s arguments, the final decision found that the temporary commercial deficit of the balance-of-payments did not, in and of itself, constitute “concrete harm to the Brazilian public order and economy” and did not justify waiving the constitutional 90-day holding period.678 Thus, the Court held that Decree nº 7.567/2011 did indeed violate the Constitution and granted a 90-day period to raise the IPI (i.e., only after December 16th). On November 10, the government published
676 Freely translated from Portuguese: “quando se torne necessário atingir os objetivos da política econômica governamental, mantida a seletividade do produto,” ou, ainda, para “corrigir distorções.” See Decree-Law 1.191/1971. 677 See Quinta-feira, 20 de October de 2011 Suspensa vigência de Decree que alterou alíquotas do IPI sobre automóveis," www.stf.gov.br/portal/noticia/verNoticiaDetalhe.asp?idConteudo=192030. 678 “Mantida liminar que suspende aumento de IPI por 90 dias para carros da Chery,” Migalhas, 4 October 2011. Available at: www.migalhas.com.br/Quentes/17,MI142599,41046- Mantida+liminar+que+suspende+aumento+de+IPI+por+90+dias+para+carros (accessed 20 June 2016). page 185
Decree nº 7.604/2011, altering the date of effect as determined by the Supreme Court, and thus giving the importers a little relief.679
The DEM party also looked to another constitutional remedy to appeal to the Supreme Court: namely, a request for non-compliance of basic principles (Arguição de Descumprimento de Preceito Fundamental – ADPF nº 245). 680 The DEM party argued that the IPI tax measure violated basic constitutional principles enshrined in Article nº 170 of the Brazilian Constitution, which guarantees fair competition and equality in the country’s economic order. Based on Law nº 9.882, the ADPF remedy described in Article nº 102 of the Brazilian Federal Constitution has as its objective the “avoidance of harm or the reparation of harm to a fundamental constitutional precept that has resulted of an act by the Public Administration.”681 The DEM Party claimed that the new IPI tax discriminated against Asian producers when compared to Argentinean or Mexican producers, violating principles of fair competition, equality, and proportionality. Additionally, they argued that the IPI measure did little to contribute to the development of the Brazilian auto sector and to protect the Brazilian industry. 682
Regarding the application of rules of international law, the DEM Party alleged that Brazil’s respect for the MERCOSUR rules should not at any point override Brazil’s obligations in the context of the World Trade Organization. The party argued that the measure did not aid the Brazilian producers given that assemblers located in Brazil—such as General Motors, Volkswagen, Ford, and Fiat--were foreign-owned. Similarly, so were the assemblers in Argentina and Mexico. The petition argued that the measure was contributing to higher- priced products in Brazil and would impair healthy market competition within the Brazilian
679 See Pedido de Medida Cautelar, Ação Direta de Inconstitucionalidade 4661. ADI 4661 MC/DF, rel. Min. Marco Aurélio, 20.10.2011. (ADI-4661). Available at: www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=4661&classe=ADI&origem=AP&recurso= 0&tipoJulgamento=M (accessed 20 July 2016). 680 Argüição De Descumprimento De Preceito Fundamental 245 Relator Atual Min. Marco Aurélio Reqte.(S) Democratas - DEM Published on 12/12/2012. Available at: www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=245&classe=ADPF&origem=AP&recurso =0&tipoJulgamento=M (accessed 13 October 2017). 681 Freely translated from Portuguese: Art. 1o A argüição prevista no § 1o do art. 102 da Constituição Federal, “será proposta perante o Supremo Tribunal Federal, e terá por objeto evitar ou reparar lesão a preceito fundamental, resultante de ato do Poder Público.” See Law LAW nº 9.882, 3 of December 1999. Available at: www.planalto.gov.br/ccivil_03/Laws/l9882.htm (accessed 13 October 2017). 682 Argüição De Descumprimento De Preceito Fundamental 245 Relator Atual Min. Marco Aurélio Reqte.(S) Democratas - DEM Published on 12/12/2012. Available at: www.stf.jus.br/portal/processo/verProcessoAndamento.asp?numero=245&classe=ADPF&origem=AP&recurso =0&tipoJulgamento=M (accessed 13 October 2017). 682 Freely translated from Portuguese: Art. 1o A argüição prevista no § 1o page 186 market. Ultimately, the constitutional challenge focused on avoiding “harm to a fundamental principle due to the act of the public administration.”683
In this case, the court found that the administration’s actions had not fundamentally harmed constitutional principles. Instead, the Court found that the DEM's claim did nothing more than push the patrimonial interests of a limited number of assembly companies operating in Brazil. The economic effects from the rise in Asian imports and the alleged more favorable treatment towards MERCOSUR assemblers were not easy to discern and could only be identified through systematic economic analysis. Nevertheless, the court found that the issue lacked the necessary constitutional relevance to require the Court’s analysis.
In sum, on the first claim, the Supreme Court found that the trade deficit that prompted the government’s imposition of the IPI measure did not threaten “concrete harm to the Brazilian public order and economy” as alleged by the Brazilian government. On the basis of the economic evidence at hand, the Court understood that the surge of Asian imports was not harming the Brazilian market and upheld the constitutional holding period, thus exempting the Chinese automakers located in the State of Espírito Santo from the 90-day holding period. On the second claim, the Court found that there was no “harm to any fundamental constitutional precept that has resulted from an act of the administration.” It claimed that the economic evidence available was not sufficient to decide whether the government was according was less favorable treatment to Chinese producers relative to Mexican and Argentinean producers. Thus, the Court held that no harm to any constitutional principle, namely the principles of the economic order, could be found at that time.
The legal definitions of “harm” to define economic “harm towards the Brazilian industry” and “harm” to define economic “harm towards Chinese companies in Brazil” relied on unclear standards of economic evidence. The Court ultimately based its decisions about its understanding of “harm” on a market effect test, though it failed to explicitly set forth the standard or consistently analyze the economic evidence. Ultimately, this state of affairs meant that the conservative DEM Party succeeded in maintaining the lower IPI tax for Venko
683 Freely translated from Portuguese: Nos termos do Artigo 1 da Law n 9.882, de 3 de December de 1999, a arguição de descumprimento de preceito fundamental tem por finalidade evitar ou reparar lesão, resultante de ato de Poder Público, a preceito fundamental. Available at: https://stf.jusbrasil.com.br/jurisprudencia/22846790/arguicao-de-descumprimento-de-preceito-fundamental- adpf-245-df-stf (accessed 13 October 2017).
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Motors, represented in Brazil by the Chinese assembler Chevy Motors. The DEM Party, the only conservative-libertarian party in Brazil, used constitutional remedies to question the legal definition of “harm” to try to reverse the IPI tax reduction in the economic policy implemented by the- then ruling labor party (PT), and their political opposition.
Ultimately the ideological disparities, as well as the contrasting understanding of what constituted apt economic policy, was translated into the legal struggle surrounding the definition of “harm” in Brazilian constitutional law. On the one hand, the Federal government claimed that the measure was necessary to prevent the loss of jobs and to incentivize local firms to develop, innovate, and compete with foreign firms. On the other, the opposing DEM Party argued that the measure was prejudicial to the interests of Chinese assemblers in the country and that it was unsound economic policy given that it would increase prices for consumers and create an uncompetitive domestic market.
The Court’s decision to reject the DEM’s second claim regarding “harm to the fundamental constitutional principles” on the basis of that there was economic evidence to determine no “grave harm to the economic order” as alleged by the Brazilian government, shows a distributional choice in the use of this legal concept. Further, it shows how legal engineering was used to shield Chinese companies from the differentiated IPI tax, reflecting the distributional effect of the Supreme Court’s legal decision.
b. INOVAR-AUTO’s Imprecise Legal Definitions and Changing Regulatory Environment
A second important way in which the Brazilian Government struggled in its efforts to impose its regulatory authority on domestic markets rested on disputed legal instruments, which provoked political and economic struggles. Thus, the Federal state’s ability to implement counter-crisis measures related to the legislative process and diffused regulatory attributions throughout the administrative structure of the country. The INOVAR-AUTO regime, an industrial policy plan envisioned to last for four years, ran into setbacks due to the lengthy domestic regulatory process to define concepts and implement aspects of the Decree.684 This process relied on different governmental bodies and organs to regulate different aspects of the
684 Fernando Neves, Inovar-Auto: Urgência nas Regulamentações, AUTOMOTIVE BUS. (Aug. 5, 2013), http://www.automotivebusiness.com.br/noticia/17648/inovar-auto-urgencia-nas-regulamentacoes. page 188 regime, demanding a considerable investment in coordination and mutual recognition for the program to work.
A critical example of this was the need to define the term “strategic inputs and tools”685 in Article 12 of the Decree nº 7.819. Among the categories of expenditure, that “strategic inputs and tools” represented the largest share of presumed IPI tax credits that companies could accrue under the regime. That is to say, the categories offering companies the most significant opportunity to earn tax credits were only defined two years into the implementation of the regime. Likewise, the government only established a tracking system to verify the required local content and local processes usage by each firm in October 2014. Without these two key factors being clearly defined in the law and implemented, the policies established by the INOVAR-AUTO Decree were employed sub-optimally and only operated as intended by the government during the third year of the program.
The law also failed to specify how the local content requirement would operate. The Brazilian Association of Auto parts Manufacturers (Sindipeças)686 argued that the government needed a method for tracing the origins of parts in motor vehicles. In that context, companies were given a provisional choice to self-certify until the government was able to institute a traceability mechanism. Effectively, this situation led to uncertainty in the composition of Brazilian made vehicles and irregular self-reporting.687 Much like the definition of “strategic inputs and tools,” the tracking mechanism was set up in a complicated series of regulatory installments throughout the first and second years of the INOVAR- AUTO regime. In April 2013, Portaria nº 113688 established that auto parts used by assemblers in Brazil were to have their origin verified through a tracing method.689 Although the government had defined the parts to be traced, it was still ambivalent on how to carry out the tracking of auto parts. In July 2013, the Brazilian authorities reported on the status of the
685 INOVAR-AUTO Decree, art.12(I). 686First Written Submission by the European Union, supra note 581, at para. 250–251. 687 Carina Leão, Inovar-Auto: Alguns aperfeiçoamentos, INDUSTRIAL HEATING BRASIL (Sept. 17, 2014) https://www.aquecimentoindustrial.com.br/inovar-auto-alguns-aperfeicoamentos. 688 Portaria No. 113, de 21 de March de 2013, D.O.U. 21.03.2013, art. 3. 689 Parts to be traced were the car body and chassis, light system, braking system, suspension and dampers, cooling system, tires, wheels, exhaust, engine, electronics, steering system and control panels. These items represent 85 percent of the components used to make a vehicle. See Giovanna Riato, Inovar-Auto: MDIC Define Componentes para Rastreabilidade Portaria Regulamenta Autopeças que Terão Origem Verificada, AUTOMOTIVE BUS. (Apr. 17, 2013), http://www.automotivebusiness.com.br/noticia/16815/mdic-define- componentes-para-rastreabilidade. page 189 implementation, stating that a specialized consulting firm was completing research on a system developed to assess local content.690
During the first half of 2014, the Brazilian government announced the creation of an online tracking system,691 the “Tracking System for the INOVAR-AUTO Program.” This system became functional on October 1, 2014.692 On November 14, 2014 the adoption of Portaria nº 290 introduced a new article in Portaria nº 113 (new Article 7-A), giving the Secretariat of Development of Production access to the SISCOMEX system of registration of international trade operations, facilitating the verification of the declarations. In parallel with finalizing the tracing system through compulsory declarations by vehicle assemblers and suppliers, the Brazilian authorities established the final rules regarding the specific tax consequences created by the use of a higher or lower proportion of domestic or foreign auto parts. This was achieved through Portaria nº 257 of 23 September 2014. The rules prompted a response from EU officials. In their First Written Submission to the WTO, the EU argued that Portaria nº 257 was argued in an
“extremely opaque way, and this must have been done on purpose. This opacity not only made it harder for the European Union to decipher the system, but it also makes it more difficult for operators to read and understand the relevant rules.”693
Because the system was implemented so late in the regime, it meant that the manner in which the presumed IPI tax credit was calculated in the first two years of the program was different from how it was in the remaining two years.694 This discrepancy created a complication not only for the companies already operating in the system, but also for potential trade partners trying to calculate the effect of the measures and those trying to assess the successes and the faults of the program.
The constantly changing regulatory environment delayed the effects and the implementation of the regime. According to Navarro, the multiplicity of actors involved – from both the
690 Monitoring of sectoral measures, Greater Brazil Plan (Acompanhamento das medidas setoriais, Plano Brasil Maior), July 2013, p. 41. 691 See Sistema de Acompanhamento do Inovar-Auto. Available at: http://inovarauto.mdic.gov.br/InovarAuto/public/login.jspx;jsessionid=fgHwXPKYWthSmDpxlsFphHq5kYtdG 5jhGvLx2QqjT1DhHWWd6Ch7!-1945216181?_adf.ctrl-state=ecj64wi7e_4 (accessed 12 July 2016). 692 Sindipeças – Orientações Inovar-Auto. Available at: http://www.sindipecas.org.br/sindinews/Economia/Orientacoes_Inovar_Auto.pdf (accessed 12 July 2016). 693First Written Submission by the European Union, supra note 581, para. 272. 694 Edison da Matta, ‘Valoração da Parcela Dedutível” Agencia ABC, Sistema Inovar-Auto, Assuntos Tributários. Available at: http://www.agenciagabc.com.br/arquivos/upload/file/Sistema_InovarAuto_AssuntosTribut percentC3 percentA1rios.pdf (accessed 12 July 2016) page 190 government (MDIC, Science & Technology Ministry, Finance Ministry, Civil House, Presidency, State Governors, Congress members) as well as from the private sector (National Association of Automobile Manufacturers - ANFAVEA, Brazilian Association of Importers of Automotive Vehicles - ABEIVA, Auto Parts Union - SINDIPEÇAS, media entities) contributed to this unstable regulatory framework.695 As such, the creations of the INOVAR- AUTO regime brought major challenges to both the government and private actors, given that legislators themselves could not paint a clear picture of all the parameters of the brand new regime and were unable to coordinate stakeholders.696
Aguiar states that, due to the overcomplicated and frequent regulatory changes, assemblers based in Brazil had to create interdisciplinary committees to make sense of the relevant legal framework. Engineering, finance, and legal specialists composed these committees, which were designed to understand and interpret the continually-shifting INOVAR-AUTO regulations. The regulatory changes were so recurrent that companies did not have the necessary time to internalize and implement the legal requirements before having to start over with scrutinizing yet another new regulation.697 Similarly, the speed at which INOVAR- AUTO regulations required companies to modify and adapt their production processes was not realistic, according to industry spokespeople. Many times, the changes required by the regime were so substantial that their implementation alone would have taken more time than the program’s scheduled life span.698
4. Global Value Chains and Corporate Governance
As discussed in the case study of the New Auto Regime in Brazil (1995-1999) (see Chapter II.A), the scope of states’ regulatory autonomy relates to corporate governance and production processes embedded in global value chains (GVC). On the one hand, the New Auto Regime case study exemplified how the influence of global value chains and corporate governance affected the regulation of relationships between assemblers, first-tier suppliers and contractors within the GVC as well as in the geographical organization of automotive
695 Rodrigo Navarro et al., BMW and the Brazilian Federal Government: Enhancing the Automotive Industry Regulatory Environment, 6 INT’L J. ARTS & SCI. 551, 560 (2013). 696 Id. 697 Pedro Kutney, Metas do Inovar-Auto Preocupam Empresas, AUTOMOTIVE BUS. (June 29, 2014), www.automotivebusiness.com.br/noticia/20152/metas-do-inovar-auto-preocupam-empresas; see also Lucas Augusto Ribeiro, Análise do Processo de Implementação do Inovar-Auto 19 (2014) (unpublished graduate thesis, Universidade Estadual Paulista, Faculdade de Engenharia de Guaratinguetá) (on file with Universidade Estadual Paulista), http://repositorio.unesp.br/bitstream/handle/11449/123092/000823303.pdf. 698 See Ribeiro, supra note 697. page 191 clusters in the region. On the other, the INOVAR-AUTO regime showed even more explicit relationships in terms of the legal processes and the role of law.
The INOVAR-AUTO case study demonstrates how global corporate strategy and government regulation must co-exist and respond to each other. The Brazilian government found itself responding to newly organized production structures while struggling to shape and regulate them in the interest of its declared domestic goals. The current case study maps the role of law in coordinating fragmented activities in global value chains and the part played by GVCs in propagating legal rules and shaping international economic governance.
a. The BMW Effect in Shaping the INOVAR-AUTO Regime
On March 24, 2011, BMW699 officials met with Brazil’s Minister Fernando Pimentel at the Ministry of Industry and Commerce Ministry (MDIC). The occasion marked BMW’s first public announcement of its intention to start manufacturing cars in Brazil. BMW set up a team with the Ministry’s Production Development Secretariat (SDP), led by Secretary Heloisa Menezes and the MDIC Automotive Sector Director, Mr. Paulo Bedran, to schedule several institutional meetings and to evaluate and test the feasibility of its plans in Brazil.700 During the following months, BMW representatives met with high-ranking executives from the National Development Bank (BNDES) to discuss project-financing possibilities as well as with State Government authorities and other local institutions to try to evaluate the quality and availability of infrastructure, human resources and local fiscal incentives.
While the BMW negotiations were underway, the Brazilian government launched the “Greater Brazil Plan” on August 2, 2011, through Provisional Measure nº 540/2011. During the initial stages of the implementation of the Greater Brazil Plan, the Brazilian government stated only that, with regards to the automotive sector, it would put fiscal incentives in place until 2016.701 Modest as that step was, however, it was enough of an impending regulatory change that BMW temporary suspended its plans.
The government’s Decree nº 7.567/2011 and Provisional Measure nº 540/2011 made BMW’s concerns real by increasing the IPI tax by 30 percentage points on all imported cars. As
699 Bayerische Motoren Werke or Bavarian Motor Works is a German multinational company which currently produces luxury automobiles and motorcycles and also produced aircraft engines until 1945. 700 Navarro et al., supra note 695. 701 See generally Brasil Maior (2013). Available at: http://www.brasilmaior.mdic.gov.br (accessed 6 August 2016). page 192 explained above (see Section 1), the Decree in question included an exception to the extra IPI taxes for manufacturers already operating in the country that (1) showed at least 65 percent of local (or MERCOSUR) product content in 80 percent of its portfolio; (2) could prove Research and Development (R&D) investments of at least 0.5 percent of total company revenue; and (3) performed a set of minimum predefined manufacturing operations (e.g. welding, plastic injection, assembling, painting) that comprised at least 80 percent of its local production.
The Decree came as a blow to BMW’s plans. The measure affected imported cars across the board, making no distinction for high or low-cost models, regular or premium cars. BMW, which intended to manufacture high-performance premium cars in Brazil, was dismayed at this unfortunate surprise. Similarly, the measure drew negative reactions from international trading partners; importers associations (ABEIVA – Associação Brasileira das Empresas Importadoras de Veículos Automotores – Automotive Vehicles Importers’ Brazilian Association) and manufacturers associations (ANFAVEA – Associação Nacional dos Fabricantes de Veículos Automotores - Automotive Vehicles Manufacturers National Association) reacted to the new measure by pushing and pulling the government in different directions.
The government thus found itself in the tricky position of managing the interests of the domestic manufacturers as well as those of foreign investors. While the former attempted to protect their market share against the surge of Asian imports, the latter were ready to invest in a potential market for their products given the right regulatory environment. Additionally, the Federal government was under pressure from States that could potentially receive investments, i.e., the States of Rio de Janeiro, Minas Gerais, São Paulo, Paraná, Rio Grande do Sul and Santa Catarina, and sought to create a more favorable environment for investors.
With this backdrop, BMW immediately sought meetings with the MDIC and Finance Ministers in September and October 2011 to renegotiate the terms of a possible investment in the country.702 According to the BMW representative:
“BMW had to face two big political challenges: first, the Government responded to the massive pressure on the competitiveness of the established manufacturers by putting in place a modified tax regime for imported vehicles (increase in IPI); secondly, Brazil embarked on a pathway towards higher efficiency of vehicles in order to reduce fuel consumption and CO2 emissions. Both decisions were taken right
702 Navarro et al., supra note 695. page 193
in the middle of BMW’s planning process and therefore required a full reassessment of the project. It was imperative for BMW to seek a new pathway for its presence in Brazil combining a setup of local production and supply that meets the expectation of the government, while being realistic in terms of the locally available level of technical competence and on the other hand ensuring that the future product portfolio 703 would comply with the upcoming CO2 regulation.”
In an attempt to overcome the challenges encountered in the change of legislation and the uncertainties of the regime, BMW negotiated the insertion of a carve-out provision for niche vehicles in the INOVAR-AUTO regime.704 BMW characterized this specific segment of the market as the premium segment market, composed of vehicles manufactured in low volumes and sold at high prices. The proposal was presented as a distinctive niche to be included in the presumed IPI tax credits and later versions of the automotive regime. In essence, BMW argued for the inclusion of its specific type of vehicles in the program in a manner that would allow for the protection of domestically produced vehicles (of a larger volume and cheaper price range) while inserting enough of an exception to the regime to allow BMW to proceed with its business plans in Brazil.
The suggestion gained traction during the negotiating period for the INOVAR-AUTO regime and was included in Provisional Measure nº 563/12 and Decree nº 7.716/12, which set out new general guidelines for the regime. The new legislation modified the conditions for eligibility in the program, the energy and efficiency requirements for companies taking part in the regime, and included transitional rules to attract new investments. On the latter modification, the regime established that, during the construction of a new factory, the IPI on imports would generate credits to be used after the start of production, with a limit of 50 percent of the production capacity set out on the original pre-approved project. Following publication of the INOVAR-AUTO program, BMW representatives undertook another round of “fine-tuning” and arranged meetings with the MDIC/SDP technical team, Finance Ministry representatives, and the MCTI Executive Secretary between May and July 2012.705
703 Id. 704 During this period, BMW held key meetings with the Head of the European Union Commission in Brazil, Mrs. Ana Paula Zacarias; the German Ambassador in Brazil, Mr. Wilfried Grolig; the Economic Counselor of the British Embassy, Mr. Jonathan Dunn; and the Operations Director of the National Industry Confederation (CNI), Mr. Carlos Abijaodi. Other important meetings on the subject were then conducted in December of 2011. They included the Finance Minister, Mr. Guido Mantega; the Finance Ministry Executive Secretary, Mr. Nelson Barbosa; the President of the Brazilian Industrial Development Agency (ABDI), Mr. Mauro Borges; the MDIC/SDP Automotive Sector Director, Mr. Paulo Bedran; and the Civil House Chief Minister, Mrs. GLawsi Hoffmann. See id. 705 Id. at 562. page 194
Regarding BMW’s involvement in the process, the then Finance Minister, Nelson Barbosa, stated that:
“(…) the BMW team had a crucial participation, due to the objectivity and seriousness of the proposal presented. The BMW case served as reference for the government to analyze the peculiarities and needs of new players in high-income segments, with small production volume in relation to automakers already installed in Brazil. As this is a new segment in Brazil, the information from BMW helped the government to improve the design of the INOVAR-AUTO program.”706
The new Decree and the new plan for the auto industry brought more flexible rules for newcomers, and comparative advantages for the premium segment, defined by the Brazilian government in Article 12, §5, III of the INOVAR-AUTO Decree:
“companies established in the country, in accordance with the terms of the Decree, with an investment project for the installation of a single plant with a production capacity up to 35,000 units of vehicles, and with specific investments of at least R$ 17,000.00 per produced vehicle.”
The parameters outlined in the INOVAR-AUTO Decree for the BMW project served as the basis for the rules for all newcomers to the newly established premium segment. For this segment, the INOVAR-AUTO Decree listed differentiated conditions for participation in the regime and for accruing the 30 percent presumed IPI tax credit. For newcomers (with the case of BMW in mind), the new regime applied the factor of 1.30 (i.e., 30 percent presumed IPI tax credit) throughout the entire duration of the INOVAR-AUTO program, provided that the respective companies: (1) had established themselves in Brazil, by investing in the installation of a single plant for vehicles classified under the codes set out in Annex XIII, which would become accredited under INOVAR-AUTO; and (2) with an annual production capacity of up to 35,000 units and with a minimum investment of R$ 17 000.00.
Regarding BMW’s final decision to set up an assembly plant in Brazil, the company’s representative pointed out that “the constructive dialogue with the Federal Government Ministries during 2011 and 2012, […] and the strong supportive attitude towards BMW’s plans in Brazil at all levels were the crucial success factors for the decision taken in the end.”707 In this sense, BMW’s efforts helped to create the framework for the exceptions of the INOVAR-AUTO regime.708 The ways in which BMW influenced, directed and shaped the INOVAR-AUTO regime exemplify how large multinational companies, through their
706 Id. 707 Id. 708 Id. at 564. page 195 corporate decisions, can shape countries’ domestic regulations, influence economic policies and call for a re-discussion of previous regulatory choices.
5. Informal Regulations and Standards
As a result of the process of strengthening of international trade flows, the global automotive industry became subject to competitive pressures that increasingly favored processes of harmonization, transnational communication and regulatory competition.709 Processes involving car emission and fuel efficiency standards offer case examples of how product regulations have spread across the globe in this industry. Due to the need to access different markets and comply with internationally accepted requirements, this industry can push and shape the internal domestic legislation of countries as well as their industrial policy plans. For the purposes of analyzing how these regulations may interfere with domestic regulatory autonomy, this Section investigates whether any standard or informal regulation directed, shaped or constrained the implementation of diverging governmental preferences (if any). Similar to the case of the Brazilian New Auto Regime (1995 – 1999) in Chapter II.A, the process of elaborating and implementing the INOVAR-AUTO Regime incorporated US, EU and international standards with regard to car emissions and fuel efficiency and converted them into domestic legislation and industrial policy.
a. Fuel Efficiency Standards
One of the main ways in which the INOVAR-AUTO regime represented a departure from previous Brazilian auto industry programs related to the conditionalities to qualify for the presumed tax credits. The conditional tax incentive, based on the progressive fuel-efficiency of vehicles, was one of the main Brazilian policies to curb carbon emission by vehicles since the 1970s.
For more than forty years, the Brazilian government had implemented only a handful of significant programs aiming at reducing carbon emissions. Namely, these programs included the establishment of the National Traffic Council (CONTRAN) to supervise and implement measures to control car gas and vapor emissions;710 the Program for Vehicle Labeling
709 Holzinger et al., supra note 47. 710 LUIZ NOGUEIRA & GABRIEL BRANCO, PROMOVENDO A EFICIÊNCIA ENERGÉTICA NOS AUTOMÓVEIS BRASILAWROS (2005), http://www.inee.org.br/etanolveicular/downloads/eficiencia-automoveis- brasiLawros.pdf; Cristina Bastin, Análise da Difusão de Novas Tecnologias Automotivas em prol da Eficiência Energética na Frota de Novos Veículos Leves no Brasil (Oct. 2010) (Universidade Federal do Rio de Janeiro) page 196
(Programa Brasileiro de Etiquetagem Veicular); and the Brazilian Program for Vehicle Labeling (Programa Brasileiro de Etiquetagem Veicular - PBEV). 711
In 2012, the INOVAR-AUTO regime was implemented, in part, to further these previous efforts. Among the regime’s main goals was the commitment to improve the energy efficiency of all vehicles sold in the country.712 This goal was to be achieved by (1) creating compulsory goals for light and heavy-duty vehicles sold in Brazil from 2017 onwards; (2) creating compulsory energy efficiency goals for vehicles currently in the Brazilian market; (3) defining a minimum standard of energy efficiency to be used as a basis for governmental purchases; (4) defining the minimum investment in R&D and engineering; and (5) revising INMETRO regulations (Portaria Inmetro 544/2012) regarding tire requirements.713
The INOVAR-AUTO Decree established that companies operating in Brazil would have to secure a minimum improvement of 12 percent energy efficiency in all new light-duty vehicles between 2012 and 2017. They could also qualify for an additional 2 percent discount on IPI taxes by meeting INOVAR-AUTO’s more aggressive efficiency targets (up to 19 percent improvement over 2012 levels). The energy efficiency measurement was defined as a function of the mass of the total vehicles sold by the assembler. The INOVAR-AUTO goals, therefore, are calculated by an average of sales, measured by the average mass and number of vehicles sold in the country. The testing cycle is calculated through the ABNT Norm 7024 and by the Brazilian Institute for the Environment and Renewable Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis – IBAMA).
By August 2014, 53 companies (21 assemblers, 15 importers and 16 new investors) had already been accredited under the INOVAR-AUTO regime. The new investments confirmed
(on file with Universidade Federal do Rio de January), http://www.ppe.ufrj.br/ppe/production/tesis/cristina_smith.pdf. 711 See Portaria INMETRO nº 391; Resolution Conmetro No. 5, 6 May 2008. The Brazilian Program for Vehicle Labeling was approved in November 2008 by INMETRO to promote the efficient use of fuel according to the requirements of the “Law of Energetic Efficiency,” Law No. 10.295, de 17 de October de 2001, D.O.U. de 18/10/2001. Among its goals was informing consumers about the fuel efficiency (km/l) of vehicles sold in Brazil as well as providing information to assemblers so that they can differentiate their products within this market. The program assigns labels to the vehicles, the Label of Energy Conservation (Etiqueta de Conservação de Energia ENCE), which classifies the car models according to how it ranks amongst its like competitors regarding energy efficiency, CO2 emissions and other polluting toxics. 712 “Plano Brasil Maior - Balanço Executivo - 2 anos,” Agência BrasiLawra de Desenvolvimento Industrial - ABDI (2013). Available at: http://www.abdi.com.br/Estudo/PBM percent20- percent20Balan percentC3 percentA7o_.pdf (accessed 10 January 2017) (accessed 16 August 2016). 713 “Plano Brasil Maior - Acompanhamento das Medidas Setoriais,” Agência BrasiLawra de Desenvolvimento Industrial - ABDI, (2013). page 197 up to this point reached R$ 9.4 billion ($2.95 billion dollars), increasing production capacity to 629.7 thousand units and predicting the creation of over 15,5 direct jobs.714 The willingness of companies to adhere to both the PBEV and INOVAR-AUTO regime, the two main programs implemented by the Brazilian authorities to foster fuel-efficiency, suggests that the efficiency standards required by the program were within the margins of assemblers’ capabilities and willingness to comply.
Similarly, the Brazilian Government seems to have experienced no pushback concerning the strictness of its fuel-efficiency programs. This is in part due to the fact that the Brazilian fuel efficiency and carbon emission policies have incorporated techniques, methods and standards set out both by the US (as with its ABNT norms and cycle testing methods) as well as by the EU (with regards to the labeling programs and aimed goals for fuel efficiency). As with previous fuel-efficiency regulations, the INOVAR-AUTO program adopts standards in a comparative lag when it comes to these two markets. For instance, INOVAR-AUTO provides that vehicles must run, on average, 17.25 km/l when fueled with gasoline and at least 11.96 km/l with ethanol. Europe proposed this average for cars to be sold in the Euro region in 2016. Hence, in 2017, Brazil would be only one year behind the European legislation on energy efficiency715 and would be closely aligned to global fuel efficiency standards.
b. Car Emission Standards
The cargo and passenger transportation sector occupies a critical role when it comes to GHC gas emissions in Brazil. The consumption of fuels for light-duty vehicles, which run on petrol and ethanol, increased by 90 percent from 2003 to 2013 according to the National Fuel Balance.716 This is significant given that the Brazilian automotive market figures among the five largest in the world and retains significant growth potential given the low number of vehicles per inhabitant (5,3 people per vehicle).717 At the time of the implementation of the INOVAR-AUTO regime, the transportation sector alone was accountable for 47 percent
714 Agência Brasileira de Desenvolvimento Industrial (ABDI). Plano Brasil Maior – Inovar para Competir. Competir para Crescer. ABDI 2011-2014. Brasília DF/Brasil, 2015. 715 ADRIANA MELLO & ROBERTO MARX, THE “INOVAR AUTO” PROGRAM AND ITS IMPACTS ON ELECTRO MOBILITY IN BRAZIL (2013), http://www.redesist.ie.ufrj.br/lalics/papers/103_The_Inovar_Auto_Program_and_its_impacts_on_Electro_Mobil ity_in_Brazil.pdf 716 EMPRESA DE PESQUISA ENERGÉTICA, http://www.epe.gov.br (last visited Oct. 16, 2019). 717 Associação Nacional dos Fabricantes de Veículos Automotores (ANFAVEA). Anuário da Indústria Automobilística Brasil, 2015. Disponível em http://www.anfavea.com.br (accessed May 2015). See also Empresa de Pesquisa Energética (EPE). Plano Decenal de Energia 2023. Disponível em http://www.epe.gov.br (accessed April 2015). page 198
(215,3 MtCO2-eq) of carbon dioxide emissions in Brazil (a total of 459 million tons of
MtCO2-eq).718 Though the INOVAR-AUTO regime does not directly refer to GHC emissions or set any specific goals for carbon dioxide emissions, it does so indirectly through the regulation of fuel consumption and the imposition of fuel efficiency standards.
The goals for fuel efficiency set by INOVAR-AUTO establish a compulsory target of at least 12.08 percent of fuel efficiency improvements until 2017 as well as an optional target of 18.84 percent of fuel efficiency improvements until 2017, for an additional 2 percent presumed tax credits. Based on these projections of fuel efficiency presented at the Decennial Energy Plan – 2012,719 these targets will avoid an estimated 21.1 million tons (compulsory target) to 41.5 million tons (optional target) of carbon dioxide emissions between 2014 and 2021.720
These projections figure as voluntary targets taken by the Brazilian Government, in light of international targets and standards, to curb GHC emissions. As a developing country, Brazil is not compulsorily obliged to comply with the quantitative targets of the reduction of GHC emissions as defined by the Kyoto Protocol.721 Nevertheless, in striving to align itself with the global targets and baselines set out in the United Nations Framework Convention on Climate Change (UNFCCC), Brazil announced in December 2009, at the 15th Conference of the Parties (COP-15) in Copenhagen, the adoption of a voluntary target to reduce by 2020, between 36.1 to 38.9 percent of its total GHC emissions for that year. 722 Brazil formalized this adoption of the car emissions curbing standards with Law nº 12.187/09 and Decree nº 7.390/10 instituting the National Policy for Climate Change.723
6. Case Study Conclusions on Brazil
This account of Brazil’s post-crisis policies for the automotive industry sought to analyze the INOVAR-AUTO program in light of its interactions with different levels of regulation and
718 Natália Moraes & Bernardo Machado, "Impacto do Inovar-Auto nas Emissões Veiculares," 1(2) Blucher Engineering Proceedings (2015): 2. 719 Plano Decenal de Energia – 2021 (EPE/MME) Ministério de Minas e Energia Secretaria de Planejamento e Desenvolvimento Energético. Available at: www.epe.gov.br/PDEE/Sumario percent20PDE percent202021.pdf (accessed 10 May 2015). 720 Brazilian Ministry of Commerce and Trade (MDIC) Projeto de Law nº 5.332/2013, Câmara Legislativa, Atividade Legislativa, Comissões Permanente, Apresentações e arquivos, Audiências e Seminários, Audiência Pública 5332. 721 Kyoto Protocol, supra note 44. 722 EMPRESA DE PESQUISA ENERGÉTICA, http://www.epe.gov.br (last visited Oct. 16, 2019). 723 Política Nacional Sobre Mudança do Clima, MINISTÉRIO DO MEIO AMBIENTE, http://www.mma.gov.br/clima/politica-nacional-sobre-mudanca-do-clima (last visited Oct. 16, 2019). page 199 governance. By mapping the relationship between this regime and different regulatory pressures, the Chapter illustrated the constraints that shaped the content, form and design of the program. It exposed the manners through which important regulatory and distributive decisions were made in the establishment of the INOVAR-AUTO regime and to what extent these pressures affected the workings of the program.
First, the case study detailed how the program was received at an international level. Negotiations conducted with Brazil’s regional trading partners (Mexico, Argentina and Uruguay) addressed the same concerns raised by WTO Members and led to the incorporation of significant exceptions to the application of the INOVAR-AUTO regime. These countries negotiated carve-outs even before Brazil implemented the regime, changing the scope of the regime and the potential benefits it could reap for the Brazilian auto industry. Though the regional agreements and deals caused a significant loss of regulatory freedom, Brazil incorporated them as part of INOVAR-AUTO’s development strategy. As a result, the INOVAR-AUTO regime gained a regional perspective. The government publicized it as an attempt to structure and strengthen different parts of the production chain within the region. In this sense, while the negotiations with regional trading partners curbed Brazil’s regulatory policy space, they were justified within the stated regional developmental strategy. At the WTO, however, the program was struck down for its discrimination between domestic and foreign producers as well as due to the MERCOSUR and Mexico carve-outs. The incentives for modernization were deemed to be a version of local content requirements, and the agreement with MERCOSUR and Mexico were not deemed to be properly notified under the Enabling Clause. As a whole, the Panel and Appellate Body decisions found that the INOVAR-AUTO program violated WTO rules and recommended its withdrawal.
Second, domestic barriers to the negotiation and implementation of the program curtailed its effectiveness and impacted its stated goals. The experience of the Brazilian government with the IPI tax rate alterations exemplified how disagreements between the Brazilian government, political parties, private actors and the Supreme Court as to what constituted “serious harm to the public order and economy”724 determined the scope of action available to the government
724 Freely translated from Portuguese Art. 4º, caput, e § 1º, da Law nº 8.437/92: “Art. 4º Compete ao presidente do tribunal, ao qual couber o conhecimento do respectivo recurso, suspender, em despacho fundamentado, a execução da liminar nas ações movidas contra o Poder Público ou seus agentes, a requerimento do Ministério Público ou da pessoa jurídica de direito público interessada, em caso de manifesto interesse público ou de flagrante ilegitimidade, e para evitar grave lesão à ordem, à saúde, à segurança e à economia públicas.” page 200 to confront the crisis. The Brazilian government’s inability to install an urgent tax regime to protect the domestic market against the rapid increase of imports of foreign vehicles into Brazil shows the inherent limit of constitutional governmental action. Further, the prolonged regulatory process to implement the INOVAR-AUTO regime affected the core of the industrial policy plan itself by delaying the implementation of the program and the achievement of its goals. Crucial terminology in the legislation such as “strategic inputs” and the “traceability system” lacked definition, leaving all stakeholders uncertain as to the applicability and benefits that would result from the regime. Overall, the regime’s fragmented implementation delayed the attainment of the stated goals of the program to an extent that compromised the first two years of a four-year program.
Third, the Section explained how strategic governance of corporate strategy was a key factor in shaping how Brazil decided to implement its post-crisis economic measures. Effectively, Brazil did not consider regulatory options that failed to meet BMW’s expectations and could amount to losses for the significant BWM investment plans for Brazil. The auto regime thus included a carve-out for niche vehicles—the premium segment market—went arguably against the overall economic goal of the INOVAR-AUTO program, that is, to focus on national production processes to increase domestic productivity and modernize the Brazilian automotive sector. Regardless, policymakers framed the exception as a third category for foreign investors, allowing them to qualify for the presumed tax credits offered by the regime without undertaking the complex requirements imposed on domestic producers and importers.
Last, in looking at the effect that informal regulations and standards had on the design and implementation of the program, this case study shows that the Brazilian government had internalized these regulations decades earlier. Consider the Brazilian regulation involving vehicle fuel efficiency. From its inception in the 1970s, this regulation has incorporated regulatory choices and standards from larger markets that are home to its major auto assemblers: the EU and the US. The process of incorporating these standards has often reflected the internal logic found in those foreign markets. As such, these standards have seldom been a source of domestic struggle or contestation throughout their implementation in Brazilian auto sector policies.
This contextualization of the INOVAR-AUTO regime suggests that a more accurate depiction of Brazilian regulatory autonomy in the aftermath of the 2007-2009 financial crisis page 201 needs to take into account the domestic restraints the regime couldn’t overcome as well as the important role that multinational corporation governance had in redefining the limits of the program. In light of this, the extent to which the government thought feasible to push forward its developmental policy is reflected in the number of processes, adaptations, and changes that it tolerated when it came to the implementation of the INOVAR-AUTO regime. As demonstrated, these moments were not seen in foreground politics (regulations, public decisions, government actions, formal laws) but rather in background struggles in different levels of transnational regulatory processes.
B. The Case of the United States
The American auto industry, similar to that of Brazil, is a proud symbol of the domestic industry. When the 2007-2009 global economic crisis struck, it was responsible for about 880,000 domestic jobs, accounting for 3-3.5 percent of the country’s GDP725. Between 2007 and 2008, employment in the automotive industry dropped by 9 percent, overall sales dropped 18 percent and sales of SUVs fell by 44 percent.726 Compared to the same period in 2008, the first four months of 2009 saw GM sales reduced by 45 percent, Ford’s by 42 percent, and Chrysler’s by 46 percent.727 Since early 2007, the recession made explicit many of the industry’s previous troubles, particularly those regarding the companies’ management performances.728 By the end of 2008, the auto industry was losing about 120,000 jobs a month and Chrysler and GM were close to complete financial collapse.729 The “Big Three” automakers - Chrysler, Ford and General Motors (GM) - found themselves in a dire situation.730 An influential report by the Center for Automotive Research (CAR) estimated
725 KIM HILL ET AL., CTR. FOR AUTO. RESEARCH, CONTRIBUTION OF THE AUTOMOTIVE INDUSTRY TO THE ECONOMIES OF ALL FIFTY STATE AND THE UNITED STATES (2010), available at http://www.cargroup.org/?module=Publications&event=View&pubID=16; MICHAELA D. PLATZER & GLENNON J. HARRISON, CONG. RESEARCH SERV. R40746, THE US AUTOMOTIVE INDUSTRY: NATIONAL AND STATE TRENDS IN MANUFACTURING EMPLOYMENT (2009), http://digitalcommons.ilr.cornell.edu/key_workplace/666. 726 Claire Brunel & Gary Clyde Hufbauer, Money for the Auto Industry: Consistent with WTO Rules? 1 (Peterson Inst. for Int’l Econ., Policy Brief No. PB09-4, 2009). 727 Seung-Youn Oh, Shifting Gears: Industrial Policy and Automotive Industry After the 2008 Financial Crisis, 16 BUS. & POL. 641, 650–651 (2014). 728 Ross Eisenbrey, Management—Bad Management—Crippled the Auto Industry’s Big Three, not the UAW, ECON POL’Y INST.: WORKING ECON. BLOG (May 24, 2012), http://www.epi.org/blog/bad-management-crippled- auto-industry-big-three. 729 Brunel and Hufbauer, supra note 127, at 1. 730 See e.g. David E. Sanger, et al, Bush Aids Detroit, but Hard Choices Wait for Obama, N.Y. TIMES (Dec. 19, 2008), http://www.nytimes.com/2008/12/20/business/20auto.html; Bill Vlasic & Nick Bunkley, Hazardous Conditions for the Auto Industry, N.Y. TIMES (Oct. 1, 2008), http://www.nytimes.com/2008/10/02/business/02sales.html. page 202 that nearly 3 million jobs would be lost in 2009 if all three of the Detroit automakers ceased US production.731
The crisis also exposed the level of excess production of automobiles, heavily supported by cheap credit, which became unsustainable with the recession.732 Once the global symbol of US productivity and consumerism, the US auto industry teetered on the brink of bankruptcy and, in the process, lost hundreds of thousands of manufacturing jobs. In this context, the Bush and Obama administrations took several steps - with varying degrees of interventionism - to revamp the industry.
During the period July 2009 to February 2014, 42 federal measures were implemented in the sector.733 According to the Global Trade Alert database, out of these 42 measures, 19 were marked red, indicating discrimination against foreign commercial interests. The most representative types in this category are state aids, bailouts and other forms of financial assistance to companies. A total of 11 measures were flagged to denote potential discrimination against foreign commercial interests including import bans and local content requirements.734
This Section outlines how the US support for its auto industry was implemented in the context of the 2007 – 2009 financial crisis. Interestingly, it shows how the mechanisms and institutional design of these policies were different from those implemented by Brazil (see Section A above). Some of the initial traits seen in the US’ policies described in Chapter II were consolidated and intensified in a period of economic austerity. For instance, the close linkages between the government and the Big Three automakers now became practically impossible to dissociate. In fact, it is hard to distinguish the extent of government action available to legislators and policy makers to that of industry. The extent of the effort that both, industry leaders and lawmakers, went through to ensure survival of the Big Three nears
731 SEAN MCALINDEN ET AL., CTR. FOR AUTO. RESEARCH, CAR RESEARCH MEMORANDUM: THE IMPACT ON THE US ECONOMY OF A MAJOR CONTRACTION OF THE DETROIT THREE AUTOMAKERS 4 (2008), http://www.cargroup.org/?module=Publications&event=View&pubID=24 (last visited Oct 24, 2014). 732 Oh, supra note 727, at 644. 733 The Global Trade Alert (GTA) was launched in June 2009 when it was feared that the global financial crisis would lead governments to adopt widespread 1930s-style beggar-thy-neighbour policies. Although global in scope, the GTA has given particular attention to the policy choices of the G-20 governments ever since their leaders made a “no protectionism” pledge in Washington DC in November 2008. See United States of America: Number of New Interventions Per Year, GLOBAL TRADE ALERT, https://www.globaltradealert.org/country/222/period-from_20090101/period-to_20190722 (last visited Oct. 10, 2019); see also, Simon Evenett, Mapping Crisis-Era Protectionism in the Asia and Pacific Region (Univ. of St. Gallen, Working Paper 445, 2013). 734 Oh, supra note 727, at 641-650. page 203 the concern that would have been attributed to a public institution, public body, or an agency that performed a crucial domestic role. The ways in which this was done were increasingly mixed in nature between financial asset recovery and trade-related subsidies measures. The type of institutional mechanism used largely avoided its discussion on an international scale, as was the case with the Brazilian policies.
Policy-making for the automotive industry also relied on think thanks and research institutions collaborating closely with the government. The Brookings Institution, for instance, had a key role to play advising that the government provide short-term infusion of capital alongside strict repayment rules to require the automakers to give away or sell their overall assets to other more successful firms. Alongside government, the industry created public-private partnerships to transform the entire automotive industry. Programs to create a “high mileage vehicle economy” based on fuel cell and hybrid cars whose features includes less carbon emission and more mileage for the general consumer were developed in the context of the crisis. The loans these projects were sought on an urgent basis conditional on governmental oversight and on policy priorities. As such, the crisis for the US automotive industry during the 2007-2009 recession, as well as in the period following, conciliated government support to the struggling industry with a new strategy plan: consisting of strict government oversight, policy priorities and the plan to create a new market for automotive technological leadership focusing on energy, climate, and national security.
In this context, this Section outlines the designs and objectives of the measures implemented in the post-crisis scenario to revamp the US automotive system. It then offers conclusions regarding the main constraints felt by the government to implement these measures in light of the international trading system and its main trading partners. Regarding the main domestic measures imposed, the study finds that the close nature between the interests of the US government to support mega firms that supported a large share of the domestic economy were largely aligned with corporate of leading automakers in the brink of bankruptcy. It pinpoints how large corporations and their policy making influence shaped the options available to regulators in light of the potential damage the bankruptcy of these firms could cause to the nation. The case study shows that corporate strategy became embedded in the approved government plans with pre-determined conditionality, investment plans, management oversight as well as projects for research and development. page 204
Along with the requirements imposed on the global firms located in the US, the government seized the moment to establish fuel and energy efficiency mechanisms from the Big Three automakers. As it relates to the capacity to regulate in the international trading system, many of the measures imposed by the United States government were questioned internationally. From bailouts to loans, these indirect forms of subsidies were questioned by international trading partners but did not ultimately translate in effective constraints of the government’s autonomy to regulate according to its economic preferences at the time.
1. Post-Crisis Measures for the Auto Industry
The domestic regulatory process for the automotive industry in the United States works through a complex articulation among governmental authorities of different levels, leading industries as well as civil society institutions. The very development of this industry depended on the strong coordination between different agencies and levels of government. This disputed process, described in Section II.B, emerges from the central role that the sector plays in the economy as a whole. Given the elevated cost and visibility of automotive products, the sensitivity to imports, the significant number of jobs, investment in technology, powerful lead firms and industry associations, high rates of unionization, and the iconic status of the auto industry, the sector has increased political clout in the minds of consumers and policy-makers.
As such, governments are often willing to protect local automotive firms as much as they do for as agriculture, energy, steel, utilities, military equipment, and commercial aircrafts.6 While in the 1980s and 1990s, policy for the industry relied on voluntary export restrictions on trading partners and lavish investment subsidies by local states to bolster local employment and firms; in the financial crisis period, the nature of the measures changed. The measures evolved to different types of subsidies and bailouts, aids, bridge loans, focused on the support and development of domestic firms. After periods of intense negotiations between firms, banks and congress, urgent measures were put in place to safeguard this massive industry from collapse. The degree of government intervention was unprecedented, reaching the point of pre-approving corporate strategy, setting goals and defining production. For the purposes of the current thesis, this Section outlines the Automotive Industry Financing Program, the American Recovery and Reinvestment Act of 2009, the Auto Supplier Support Program, the American Reinvestment Act and the State specific incentive measures for the auto companies. page 205
a. Automotive Industry Financing Program (AIFP)
The first measure taken by the US government is commonly known as “the Bailout”. It started to take shape in November 2008 when representatives of the “Big Three” testified before the US Senate and House of Representatives requesting a bailout “bridge” loan that would allow the companies to overcome the financial crisis. At the time, the “Big Three” argued that the recession in the US had left them close to failure.735 While the hearings initially did not go well,736 a more urgent request was presented a few weeks later, resulting in the introduction of a bill in the House of Representatives on December 10, 2008. This legislation would authorize the use of a direct loan program previously authorized by the Energy Independence and Security Act of 2008, but the bill failed to pass a Senate vote. By the beginning of December 2008, faced with the imminent collapse of GM and Chrysler, the Bush Administration, through an Executive Order, issued a $17.4 billion emergency bailout for the two companies.737
At that point in time, the Treasury Department established the Automotive Industry Financing Program (AIFP), through which it was authorized to utilize the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act (EESA) of 2008. The Automotive Industry Financing Program was a federal program designed to avoid financial collapse of American automotive industry. The program is better known as the bailout for General Motors and Chrysler, two of the so-called Big Three automobile manufacturers. The AIFP provided loans to help the GM and Chrysler avoid bankruptcy. In return, they were required to restructure their operations in a way that would guarantee their long-term stability, including a deadline for the automakers to submit “viability plans” to the government. Treasury also made other investments including in Ally Financial and Chrysler Financial. In total, Treasury made available $81 billion through under the program.738 Under the AIFP guidelines, automakers that applied for bailout funds had to fit the following criteria:
a) Significance of scale: the automaker forms a significant part of the American automotive industry, so significant that its collapse would affect the industry as a whole.
735 Stabilizing the Financial Condition of the American Automobile Industry: Hearing Before the H. Comm. on Fin. Services, 110th Cong. (2008). 736 Thomas Klier & James M. Rubenstein, Detroit Back from the Brink? Auto Industry Crisis & Restructuring, 2008-11, 36 ECON. PERSPETIVES 35, 37 (2012). 737 David E. Sanger, et al, supra 730. 738Oh, supra note 727, at 641–65. page 206
b) Impact of collapse: the automaker’s financial collapse would cause noticeable unemployment increase throughout United States. c) Effect on credit markets: the automaker’s financial collapse would cause a major disruption to American’s credit markets and increase market uncertainty. d) Chances of survival: in spite of its loses, the automaker would be able to access enough alternative sources of capital and liquidity to turn itself around and eventually return to profitability.739 The federal government loaned and invested billions of dollars in Chrysler and GM and oversaw their financial restructuring.740 Chrysler, for instance, was unable to devise a restructuring plan to meet the requirements of the task force and filed for bankruptcy in April 2009. The proceedings included $1.9 billion debtor-in-possession (DIP) financing, which allowed the bankrupt firm to continue operating. The task force utilized an “obscure” Section of the US Bankruptcy Code, Section 363(b) of Chapter 11,741 which allowed the allocation of viable assets to a “new” Chrysler. In addition, the “new” Chrysler received a final TARP installment of $4.6 billion from the federal government.742
The assets of old Chrysler were sold to a new company, Chrysler Group LLC, whose largest owner was United Auto Workers’ retiree medical trust fund, with 67.7 percent.743 Fiat took a management role and a 20 percent equity stake in the company (without making a financial contribution). In addition, Fiat was prepared to transfer valuable technology to Chrysler and, after extensive consultation with the Administration, committed to building new fuel-efficient cars and engines in US factories.744 The bankruptcy court decision in the case of Chrysler outlined the steps that Fiat could take to raise its equity stake in New Chrysler by meeting three performance benchmarks, including production at a US plant of both a new fuel- efficient engine and a new vehicle with fuel efficiency of at least 40 miles per gallon.”745 These steps were taken by Fiat in 2011 and by the end of the same year its stake in the company reached 58.5 percent, with the potential of rising to more than 70 percent.746 The
739 See generally Overview of the AIFP (Automotive Industry Financing Program), FINANCIAL WEB http://www.finweb.com/loans/overview-of-the-aifp-automotive-industry-financing-program.html (last visited Oct. 9, 2019). 740 See Fact Sheet, Fiancial Stability Prgrams, TREASURY https://www.treasury.gov/initiatives/financial- stability/programs/Other percent20Programs/aifp/Documents_Contracts_Agreements/autoFactSheet.pdf 741 While the conventional bankruptcy restructures the corporation as a whole, Section 363 “allows the bankrupt company to quickly transfer intact, valuable business units to a new owner” and immediately operate as a solvent corporation. Klier & Rubenstein, supra note 741, at 40. 742 Id. at 37. 743 BAIRD WEBEL & BILL CANIS, CONG. RESEARCH SERV., R41940, TARP ASSISTANCE FOR CHRYSLER: RESTRUCTURING AND REPAYMENT ISSUES (Sept. 7, 2012), https://digitalcommons.ilr.cornell.edu/key_workplace/940. 744 See generally FINANCIAL WEB, supra note 739. 745 WEBEL & CANIS, supra 743, at 8. 746 Id. page 207
Congressional Research Service’s final account of the Chrysler bailout estimated a $1.3 billion gap between the funds loaned to Chrysler and funds repaid.747
Unlike its view with regards to Chrysler, the task force’s position regarding General Motors was that it was “too big to fail”.748 It decided, however, that GM could not survive under its existing leadership and requested the GM CEO to step down at the end of March 2009.749 The US Treasury appointed new management and new members to the company’s board of directors. The federal government provided a TARP installment of $30.1 billion during the bankruptcy proceedings as DIP financing, and therefore the US government was the majority owner of the new GM that emerged from the bankruptcy process (most of the TARP loans were converted into an initial 60.8 percent ownership stake). The governments of Canada and Ontario together held 11.7 percent, the employees’ trust fund (VEBA) held 17.5 percent, and unsecured bondholders and creditors of the old GM held 10 percent.750 Later, on November 18, 2011, GM launched an initial public offering (IPO), which sold shares worth $23.1 billion. The IPO sold more shares than initially intended and at a higher price than the target price originally set by GM. The success of GM’s IPO was attributed to the improving performance and outlook of the US economy, as well as to the internal restructuring of the company.751 In total, assistance for GM realized an $11.2 billion loss.752
b. The American Recovery and Reinvestment Act of 2009 (ARRA)
On February 17, 2009, the US Congress approved the American Recovery and Reinvestment Act of 2009 (ARRA). Supporters claimed that passage would increase output and decrease unemployment.753 The federal government enacted the approximately $800 billion ARRA to provide a countercyclical impulse during the economic downturn in the United States. It aimed to fund tax cuts and supplements to social welfare programs as well as increased spending for education, health care, infrastructure and the energy sector.
According to ARRA’s statement of purpose, the act was developed to preserve and create jobs and promote economic recovery as well as to assist those most impacted by the
747 Klier & Rubenstein, supra note 736, at 41. 748 Id. at 42. 749 Id. 750 Id. at 37. 751 BILL CANIS, ET AL, CONG. RESEARCH SERV., R41401, GENERAL MOTORS’ INITIAL PUBLIC OFFERING: REVIEW OF ISSUES AND IMPLICATIONS FOR TARP (2010), http://digital.library.unt.edu/ark:/67531/metadc29605. 752 Tim Higgins, US Lost $11.2 Billion in GM Bailout, TARP Report Says, BLOOMBERG (May 1, 2014), http://www.bloomberg.com/news/2014-04-30/u-s-lost-11-2-billion-on-gm-bailout-latest-tarp-report-says.html. 753 American Recovery and Reinvestment Act of 2009, Pub. L. 111-5, 123 Stat. 115 (2009). page 208 recession. Additionally, it sought to provide investments to increase economic efficiency by spurring technological advances in science and health; invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits. The 2009 ARRA also prohibited the use of recovery funds for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the US.
Finally, it attempted to stabilize State and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases. At the same time, state governments, almost all of which have balanced budget requirements that restrict borrowing across fiscal years, had already begun to lay off employees, cut spending and transfer programs, and raise taxes.
State governments used their tax system to partner with the private sector on economic development initiatives. A key part of their economic development strategy was to use tax incentives as one tool of economic development to compete with other states and globally for investment, jobs, and income. During the crisis, the ARRA mitigated this subnational contractionary fiscal impulse by routing roughly a third of the total through state and local governments. The largest of these programs was the increase in the federal match component of state Medicaid expenditures.754 An example of the stimulus offered to state can be seen in the table that follows:
Table 7 : Loans and Stimulus Packages per State
Amount State No. of Types Town, City or Years Grants County $1.26 billion Michigan 98 Property tax Warren, 1992- Industrial Facilities Property Tax abatement Lansing 2011 Exemptions, MEGA (Michigan Economic Growth Authority) Tax Credits, Michigan Business Tax Battery Credit
$306 million Missouri 6 Corporate income Wentzville 2002- Development Tax Credit, tax credit, rebate 2011 Quality Jobs Program, or reduction Job Retention Training Program
$80.8 million Ohio 12 Cash grant, loan or Defiance County, 2008- Economic Development Contingency loan guarantee Lucas County, 2011 Grant, Butler County, Investment in Training Expansion, Montgomery Business Development Grants,
754 Gabriel Chodorow-Reich, Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act, 4 AM. ECON. J. 118 (2012). page 209
Industrial Training Grants, County, Job Retention Tax Credit, Trumbull County Job Creation Tax Credit, Workforce Development Initiatives
$48 million New York 31 Property tax Tonawanda, 2003- Industrial Development Agencies abatement Rochester 2011
$26.7 million Louisiana 19 Property tax Shreveport, 2008- Industrial Tax Exemption abatement Broussard 2009
$22 million Texas 20 Property tax Arlington 1997- Tax Refund for Economic Development abatement 2011
$10 million Kentucky Business Investment Program, 2 Corporate income Bowling Green 2003- Kentucky Industrial Development Act tax credit, rebate 2011 or reduction
$7.17 million Indiana 5 Free services Fort Wayne, 2010 Skills Enhancement Fund Bedford
$2.25 million Maryland 1 Cash grant, loan or 2007 Sunny Day Fund loan guarantee
$1.1 million Pennsylvania 3 Cash grant, loan or Bucks County Opportunity Grant Program, loan guarantee Infrastructure Development Program Grant, Customized Job Training
Overall, General Motors was awarded at least $1.77 billion ($1.76 billion since 2007) from 208 grants in 16 states; Ford was awarded at least $1.58 billion ($1.57 billion since 2007) from 119 grants in 8 states and; Chrysler received at least $1.4 billion ($1.39 billion since 2007) from 14 grants in 3 states.
c. Auto Supplier Support Program
As part of the United States government’s effort to combat the economic crisis, the “auto task force” created by the Obama administration in 2008 established the Auto Supplier Support Program, to devise a specific plan to aid auto parts suppliers that were negatively affected due to the generalized financial crisis in the domestic auto industry.755 In March 2009, the task force created the Auto Supplier Support Program,756 a plan to provide up to $5 billion in financing to auto parts suppliers “to ensure that Chrysler and GM could continue to pay their parts makers during a period of uncertainty and tight credit”.757
755 Kenneth R. Bazinet, President Obama to Unveil Task Force to Give Boost to Auto Industry, NY DAILY NEWS (Feb. 17, 2009), http://www.nydailynews.com/news/politics/president-obama-unveil-task-force-give- boost-auto-industry-article-1.390347. 756 Press Release, U.S. Dep’t of Treasury, Treasury Announces Auto Supplier Support Program: Program Will Aid Critical Sector of American Economy (Mar. 19, 2009), https://www.treasury.gov/press-center/press- releases/Pages/tg64.aspx [hereinafter Treasury Announces Auto Supplier Support Program]. 757 Klier & Rubenstein, supra note 736, at 39. page 210
The Auto Supplier Program sought to strengthen the network of auto parts suppliers that design and build the components that go into American cars and trucks. With the rapid decline in auto sales, auto parts suppliers also became victims of lack of access to credit and found themselves in a place of serious uncertainty as to the viability of their business. Such supplier instability, for its turn, would have the potential to feed into the vicious circle of frozen credit markets, supplier and auto maker uncertainty, short-circuiting restructuring the efforts directed at companies like GM and Chrysler.
The Auto Supplier Program, therefore, ensured that suppliers that shipped parts to auto companies would receive guarantees for their “receivables.”758 The Program provided selected suppliers with financial protection on monies they are owed by domestic auto companies and the opportunity to access immediate liquidity against those obligations. To implement the supplier support program, GM Supplier Receivables LLC and Chrysler Receivables SPV LLC were created. The Treasury committed $3.5 billion to GM and $1.5 billion to Chrysler. Those funds were to be allocated by each carmaker to specific suppliers. Ultimately, only $290 million was loaned to GM suppliers and $123 million to Chrysler suppliers.759
Any domestic auto company would be eligible to participate in the program in the condition that they request an allocation from the US Treasury to provide government-backing and work with a third-party servicer to establish a receivables purchase program. These companies were also expected to make a financial commitment in connection with the support received from the Treasury. Equally, any US-based supplier that shipped to a participating auto manufacturer on qualifying commercial terms was eligible to participate in the program. The participating auto companies made the decisions about which suppliers and which receivables received protection. Once approved by the auto company, suppliers received the protection for a modest fee, backed by government funds. These suppliers were
758 Supplier companies generally receive payment for those shipments about 45 - 60 days later. In a normal credit environment, suppliers can either sell or borrow against those commitments (so-called “receivables”) in the interim period to pay their workers and fund their ongoing operations. 759 Thomas Klier & James M. Rubenstein, Detroit Back from the Brink? Auto Industry Crisis and Restructuring, 2008-11, at 36 ECON. PERSPECTIVES 35 (2012). page 211 also able to sell their receivables into the program for a modest discount, which would provide them with immediate liquidity.760 The program was terminated in April 2010.761
1. International Rules
Since the beginning of the crisis in 2007, the Bush and Obama administrations and the US Congress were engaged in arduous processes to design measures to support the automotive industry. As the various policies were implemented, concerns regarding their consistency with the rules of the World Trade Organization (WTO) arose among its members. In spite of the direct influx of cash in the domestic industry, favorable loan conditions, incentives for local companies meeting environmental standards as well as the use of local prime materials with Buy American provisions, none of the US measures made it to a WTO panel, NAFTA arbitration or to an effective international reprimand.
On January 28, 2009, the US House of Representatives passed its economic stimulus plan, the American Recovery and Reinvestment Act of 2009 (ARRA). Among the bills complex provisions, a specific requirement called the attention of the international community. One of its Sections required that all public projects funded by the stimulus plan use only iron and steel produced in the United States. As the automobile sector collapsed, steel producers lost a large volume of sales and the Buy American provision sought to secure a stable customer base in the US public sector. The “Buy America” provision attempted to make sure that “not one dollar of the stimulus plan should be spent on foreign steel.”762 Besides the stimulus plan passed by the House of Representatives, an additional Senate bill stipulated that, in addition to steel and iron, all manufactured goods used in projects financed by the stimulus plan must be produced in the United States.763
Soon afterwards the “Buy America” provision was implemented, Brazil, the European Union and China voiced their concern that the Act was in breach of WTO’s rules on Government
760 Treasury Announces Auto Supplier Support Program, supra note 756. 761 CONGRESSIONAL OVERSIGHT PANEL, 112TH CONG., JANUARY OVERSIGHT REP.: AN UPDATE ON TARP SUPPORT FOR THE DOMESTIC AUTOMOTIVE INDUSTRY (2011). 762 GARY CLYDE HUFBAUER ET AL., LOCAL CONTENT REQUIREMENTS: A GLOBAL PROBLEM 114 (Policy Analyses in Int’l Econ. Ser. No. 102, 2013). 763 CHRISTINA ROMER & JARED BERNSTEIN, THE JOB IMPACT OF THE AMERICAN RECOVERY AND REINVESTMENT PLAN, (2009), https://www.economy.com/mark- zandi/documents/The_Job_Impact_of_the_American_Recovery_and_Reinvestment_Plan.pdf. page 212
Procurement (GPA).764 The countries argued that the provisions of the Act extended far beyond the scope of exceptions in the GPA. This was because while US commitments under the GPA covered many federal government entities and 37 US states, a large portion of the projects funded by the stimulus bills appeared not to be covered within the scope of the GPA.765 Article I: 1 of the GPA defines the scope and coverage of the Agreement stating that
“This Agreement applies to any law, regulation, procedure or practice regarding any procurement by entities covered by this Agreement, as specified in Appendix I.” 766
As such, the Agreement of Government Procurement contains a general exception for federal funds destined for mass transit and highway projects as well as specific sensitive sectors for many of the 37 states. These include motor vehicles, construction-grade steel, and construction services. Nevertheless, the states that did not make such exclusions at the time of the signing of the agreement were deemed to be in breach of international trading rules when following the “Buy America” provision of ARRA. For example, California did not exclude construction-grade steel and motor vehicles from its GPA commitments. In the absence of a reservation or exemption, the application of Buy American provisions to projects sponsored by entities covered in the GPA would violate US obligations.767
Another alleged inconsistency with WTO rules related to a possible breach of the SCM Agreement Article 3.1(b) in which the Buy American Act would have to: (1) be a “subsidy” (involving a “financial contribution” and a “benefit”); and (2) be “contingent” on “the use of domestic over imported goods.” Article 1.1(a)(1) lists a number of possible financial contributions. Of relevance here is Article 1.1(a)(1)(iii), which refers to the situation where “a government ... purchases goods.” The ARRA stimulus seemed to satisfy this first requirement. Second, Article 1.1(b) states “a benefit is thereby conferred.” In comparing the conditions created to that of the “market,” the Buy America provisions required the use of American products unless they “increased the cost of the overall project by more than 25
764 Raymond Colitt, Brazil may challenge “Buy American” at WTO, REUTERS (Feb. 16, 2009), https://www.reuters.com/article/us-brazil-us-wto/brazil-may-challenge-buy-american-at-wto- idUSTRE51F52920090217 765 CLAIRE BRUNEL & GARY CLYDE HUFBAUER, MONEY FOR THE AUTO INDUSTRY: CONSISTENT WITH WTO RULES? (Peterson Inst. for Int’l Econ., Policy Brief No. PB09-4, 2009), https://www.piie.com/sites/default/files/publications/pb/pb09-4.pdf; GARY CLYDE HUFBAUER & JEFFREY J. SCHOTT, BUY AMERICAN: BAD FOR JOBS, WORSE FOR REPUTATION (Peterson Inst. for Int’l Econ., Policy Brief No. PB09-2, 2009), https://www.piie.com/publications/pb/pb09-2.pdf. 766 Agreement on Government Procurement, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 4B, 1869 U.N.T.S. 299 (1994). 767 Industries Clash Over ‘Buy American’ Provisions in Stimulus Package INSIDE US TRADE (Jan. 30, 2009). page 213 percent.” It therefore seemed that an argument could have been made that prices increased to up to 25 percent above the normal market price to be exact, thus conferring a benefit.
The requirement that the benefit should be “contingent on the use of domestic goods” in Article 3.1(b) also appeared straightforward. The Buy America provision called for the use of domestic over imported goods. As to the question of what is the “benefit” provided, the US government left itself the discretion not to follow the Buy America provisions under certain circumstances. As was the case with the Section 301 case, in Chapter II.B.1.c, the question here would venture into the “mandatory/discretionary” distinction and a specific contextual finding by the panel.
Although the discussion reached think tanks, academia and public authorities across the globe, authors largely reported that the type of industrial support and the context in which they were implemented were not sufficient to spur a global reaction against the measures.768 There were three main reasons for such claims. First, the lack of clear distinction between trade and fiscal stimulus came to surface again as it had done almost thirty years ago in the considerations of what were trade related measures and what was the scope of global financial authorities in relationship to the WTO (see Chapter II.A.2.b.i). Second, in a context where the requirement of ‘benefit’ through financial contribution and loans to implement public policy priorities were implemented, the forbidden subsidies discussion muddied the waters. Third, and last, due to the immensity of the companies involved, their global presence as well as the exceptional circumstances of the crisis, contingent measures to protect the auto- industry were implemented in most countries. The design, type of the measures as well as the magnitude of the industry ended up defining, more than once, which measures would be deemed trade-consistent and which wouldn’t.
2. Domestic Rules
The stimulus packages and policies to support the domestic automotive industry post- financial crisis were heavily orchestrated measures by the executive and legislative branches of government. In a spam of less than five years, the process involved intense Congressional processes to agree on a remedy regarding requests for assistance from the Detroit Three; the
768 Aggarwal & Evenett, supra note 10; Vinod K. Aggarwal & Simon J. Evenett, Do WTO Rules Preclude Industrial Policy? Evidence from the Global Economic Crisis, 16 BUS. & POL. 481 (2014), https://doi.org/10.1515/bap-2014-0040; Simon J. Evenett, The Devil is in the Details: The Implementation of Stimulus Pakages and Their Effects on International Commerce, 64 SWISS REV. INT’L ECON. REL. 111 (2009), https://ideas.repec.org/a/usg/auswrt/20096402111-137.html. page 214 issuance of short-term loans by the outgoing Bush administration; the creation of a presidential task force to manage and overlook domestic companies with the incoming Obama administration;769 the public management of Chrysler and GM’s bankruptcies as well as several post-bankruptcy initiatives by the government.
One of the first roadblocks the government encountered in implementing these measures was in convincing the US Congress that it was authorized to utilize the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act (EESA) of 2008 to implement a rescue program for the automotive industry. In particular, TARP legislation defined ‘Troubled Asset’ under the category “any other financial instrument” very broadly as to include the “equity of private firms” under Section 3(9) (B) of the Act:
“any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability”.770
Although the TARP seemed originally to target only those companies whose financial operations made them a potential risk to systemic stability, the use of the TARP to support the automotive industry suggests that a company may be considered ‘systemically significant’ merely because it employs a certain number of workers.771 This justified reallocating TARP funds from their original intended purpose – purchase of toxic assets – to private sector recapitalization. Hence, US policymakers were able to manage a key political problem that had plagued Japanese financial authorities – deep public opposition to financial sector bailouts – by proceeding rapidly, asking for a large amount of funds at the outset, pointing to the examples of Japan’s mistakes, directly involving the highest levels of executive office to build public support, and obtaining maximum flexibility during the height of financial panic.
The Bush administration exerted pressure on Congress to pass the TARP giving US financial authorities $700 billion (about 5 percent of GDP) and wide latitude to use the funds to address the crisis. In total, Treasury made available $81 billion through under the program.772 In approving the program, President Bush announced that “government has a responsibility not to undermine the private enterprise system … [but if] we were to allow the free market to
769 Exec. Order No. 13,509, 74 Fed. Reg. 30, 903 (June 26, 2009). 770 Emergency Economic Stabilization Act of 2008, Pub. L. 110-343, 122 Stat. 3765, 3767 (2008). 771 CONGRESSIONAL OVERSIGHT PANEL, 112TH CONG., MARCH OVERSIGHT REP.: THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL 107 (2011). 772 Oh, supra note 727, at 641–65. page 215 take its course now, it would certainly lead to disorderly bankruptcy and liquidation for the automakers.”773
TARP authorized the Secretary of the Treasury to purchase troubled assets from financial firms. Guiding principles for the Treasury’s management of TARP were: 1) to protect taxpayer investments and maximize overall investment returns within competing constraints; 2) to promote stability for and prevent disruption of financial markets and the economy; 3) to bolster market confidence to increase private capital investment; and 4) to dispose of investments as soon as practicable, in a timely and orderly manner that minimizes financial market and economic impact.774
To implement the supplier support program, the government created GM Supplier Receivables LLC and Chrysler Receivables SPV LLC as well as a Presidential Task Force formed and started holding meetings in February 2009.775 The Presidential Task Force was in charge of reviewing financial and operational restructuring plans submitted by Chrysler and GM and making its own specific recommendations at cabinet level meetings to the President regarding the restructurings and the requests for funds from the companies. Recommendations also included directives on improving wage and benefit structures, and developing fuel efficient competitive cars for the future.776
Overall, the Treasury committed $3.5 billion to GM and $1.5 billion to Chrysler. Those funds were to be allocated by each carmaker to specific suppliers. Ultimately, only $290 million was loaned to GM suppliers and $123 million to Chrysler suppliers. There were fees associated with tapping into that program. According to Rattner, “suppliers thought twice
773 STEPHEN COONEY ET AL., CONG. RESEARCH SERV., R40003, US MOTOR VEHICLE INDUSTRY: FEDERAL FINANCIAL ASSISTANCE AND RESTRUCTURING 8 (2009), http://digital.library.unt.edu/ark:/67531/metadc83892. 774 BILL CANIS & WEBEL BAIRD, CONG. RESEARCH SERV., R41978, THE ROLE OF TARP ASSISTANCE IN THE RESTRUCTURING OF GENERAL MOTORS 3 (Aug. 30, 2011) 775 Press Release, U.S. Dep’t of Treasury, Description of PR (Feb. 20, 2009) (on file with). http://www.ustreas.gov/press/releases/tg36.htm Archived 2009-09-04 at the Wayback Machine, U.S. Dept. of the Treasury, February 20, 2009 776 For example, when GM’s Chief Executive wanted to move the company’s headquarters from the Renaissance Center in Detroit to its Tech Center in Warren, MI to be closer to the workforce, which made some business sense, the administration blocked the move. Congress and the administration both set restrictions on executive compensation for TARP recipients (for example, the CEO’s annual compensation was capped $9.5 million). The administration included a “vitality commitment” as a condition of receiving funding, which prevented the companies from moving work at U.S. plants to other locations. See Austan Goolsbee & Alan B. Krueger, A Retrospective Look at Rescuing and Restructuring General Motors and Chrysler, 29 J. ECON. PERSPECTIVES 3, 29 (2015). page 216 before signing up.”777 On March 30, 2009, President Obama announced the results of the task force’s review. It concluded that neither GM’s nor Chrysler’s plan had established a credible path to viability. The task force found that Chrysler’s plan to close plants and dealerships, reduce labor costs, and change operations did not go far enough.778 GM’s plan was found not to be viable primarily because of “overly optimistic assumptions about macroeconomic prospects and GM’s ability to generate sales”.779 The President’s announcement offered the following lifelines to the two companies: Chrysler could obtain working capital for an additional 30 days in order to devise a more thorough restructuring plan that would be supported by its major stakeholders, such as labor unions, dealers, creditors, suppliers, and bondholders.780 GM was provided with 60 days of working capital in order to submit a substantially more aggressive plan.781
The task force seriously questioned whether Chrysler could become a viable entity. According to Rattner, “from a highly theoretical point of view, the correct decision could be to let Chrysler go”.782 Nonetheless, if Chrysler were liquidated, buyers of its most attractive vehicles—Jeeps, minivans and trucks— were likely to turn to Ford and GM. “Thus, the substitution effect would eventually reduce the net job losses substantially. ... We intuited that the substitution analysis was more right than wrong.”783 Ultimately, the task force determined that allowing Chrysler to liquidate during a severe recession would cause an unacceptably high loss of jobs. 784 However, it concluded that Chrysler was not viable outside of a partnership with another automotive company.
During April 2009, Chrysler worked with its stakeholders to devise a restructuring plan that could meet the requirements of the task force and avert bankruptcy. The company reached tentative agreements with most stakeholders. Among Chrysler’s creditors, the larger banks agreed to write down their debt by more than two-thirds. However, some mutual funds and hedge funds, representing about 30 percent of the company’s debt, would not agree to the
777Steven Rattner, Speech at the Federal Reserve Bank of Chicago Conference, After the Perfect Storm: Competitive Forces Shaping the Auto Industry: Reflections on the Auto Restructurings 4 (May 10, 2010), www.chicagofed.org/digital_assets/others/ events/2010/automotive_perfect_storm/rattner.pdf. 778 CANIS & WEBEL, supra 774. 779 CONGRESSIONAL OVERSIGHT PANEL, 112TH CONG., MARCH OVERSIGHT REP.: THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL 97 (2011). 780 CANIS & BAIRD, surpa 778. 781 CONGRESSIONAL OVERSIGHT PANEL, 112TH CONG., MARCH OVERSIGHT REP.: THE FINAL REPORT OF THE CONGRESSIONAL OVERSIGHT PANEL 107 (2011). 782 Rattner, supra note 777. 783 Id. at 3–4. 784 Id. page 217 proposal. Chrysler could only avoid bankruptcy if all of its creditors approved the settlement, so the disagreement prompted its filing for bankruptcy on April 30, 2009.785 “[B]ecause of the extraordinary conditions in the credit markets [at the time],” the task force concluded, “bankruptcy with reorganization of the two auto companies using private debtor-in- possession financing786 did not appear to be an option by late fall 2008, leaving liquidation of the firms as the more likely course of action absent a government rescue”.787
To facilitate a rapid exit from bankruptcy, the task force utilized an obscure and rarely used Section of the U.S. Bankruptcy Code known as Section 363(b) of Chapter 11.28:
“Under that Section, a newly formed company would buy the desirable assets from the bankrupt entity and immediately begin operating as a solvent corporation”.788
Under Section 363, a bankrupt company would be allowed to act quickly to transfer intact, valuable business units to a new owner, as opposed to the conventional bankruptcy process requiring restructuring of a corporation as a whole. Once an obscure bankruptcy process, Section had previously been invoked as the solution for the failure of Lehman Brothers in 2008.789 The move found resistance among experts. Some suggested that it would be a mistake to treat the Chrysler and GM cases as a signal that a new order in bankruptcy law implementation is in place. They argue that few future debtors will be able to argue, as Chrysler and GM could, that the national economy is tied to their fate.790
Through Section 363(b), Chrysler’s viable assets were allocated to a “new” Chrysler. The “old” Chrysler kept the “toxic” assets destined for liquidation or write-off permitted under bankruptcy laws. A similar plan was later used for GM on its journey through bankruptcy. Chrysler had filed for bankruptcy on April 30, 2009. The validity of Chrysler sale escalated into a legal dispute. One month after Chrysler’s filing for bankruptcy, the sale of its viable assets was approved. With the judicial approval of the settlement, three Indiana state pension plans that together held about 8 percent of the company’s secured debt appealed the judge’s
785 CANIS & WEBEL, supra 774. 786 Debtor-in-possession (DIP) financing refers to financing for a business that retains control of its assets and continues to operate while under the Chapter 11 bankruptcy reorganization process. 11 U.S.C §§ 1101-1195 (LEXIS through Pub. L. 116-65). 787 CONGRESSIONAL OVERSIGHT PANEL, 112TH CONG., JANUARY OVERSIGHT REP.: AN UPDATE ON TARP SUPPORT FOR THE DOMESTIC AUTOMOTIVE INDUSTRY, at 7 (2011). 788 Rattner, supra note 777; see also 11 U.S.C §§ 1101-1195. 789 STEVEN RATTNER, OVERHAUL: AN INSIDER’S ACCOUNT OF THE OBAMA ADMINISTRATION’S EMERGENCY RESCUE OF THE AUTO INDUSTRY 60 (2010). 790 Robert Fishman & Gordon E. Gouveia, What's Driving Section 363 Sales After Chrysler and General Motors? 19 J. BANKR. L. & PRAC. 351 (2010). page 218 decision to the Second Circuit Court of Appeals in New York. The Appeals Court confirmed the sale on June 5, 2009. Holders of 92 percent of the secured debt had agreed to an exchange of debt at a value of 29 cents on the dollar. The Indiana funds had obtained their bonds a year before the bankruptcy filing at 43 cents per dollar of face value; they argued in court that they should have been repaid at that value. The dispute escalated to the US Supreme Court to decide the value of the dollar on Chrysler’s assets. On June 9, the Supreme Court allowed the sale of Chrysler to go ahead, ending the legal proceedings. Chrysler’s secured creditors were forced to accept the original offer of $2 billion. Their secured claims had amounted to $6.9 billion.791 Upon exiting from Chapter 11, the new Chrysler received a final TARP installment from the federal government of $4.6 billion in working capital and exit financing to assist in its transformation to a new, smaller automaker.792
In offering a final accounting of the Chrysler bailout, the Congressional Research Service estimated a $1.3 billion gap between the funds loaned to Chrysler and the funds recouped (see table 1). TARP had provided $10.9 billion in loans to support the company. In return for this $10.9 billion, the government earned approximately $1.7 billion in interest and other fees and recouped approximately $7.9 billion in principal ($5.5 billion in loan repayments, $1.9 billion recouped from the bankruptcy process of the old Chrysler, and $560 million paid by Fiat for the U.S. government’s new Chrysler common equity and rights), resulting in a $1.3 billion loss.793
The US government played a major role in the management of the domestic auto industries during the crisis. Domestic regulation was interpreted to consider “equity of private firms” as ‘trouble assets’ under the TARP legislation in order to enable the US government to prevent the companies from failing. The ‘systemic risk’ that the failure of these companies posed to the countries was such that the government itself established a Task Force to manage and restructure the companies. The process of bankruptcy of Chrysler and GM was undertaken through a lesser used provision under Chapter 11 of the US Bankruptcy Act to justify the incorporation of a “new Chrysler” and a “new GM”. Such interpretation of the TARP provisions and the application of Chapter 11 of the US Bankruptcy Act were questioned as dangerous precedents for corporations. The dispute escalated to the US Supreme Court to
791 CONGRESSIONAL OVERSIGHT PANEL, 111TH CONG., SEPTEMBER OVERSIGHT REP.: THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF THE DOMESTIC AUTOMOTIVE INDUSTRY (2009). 792 CANIS & WEBEL, supra 774. 793 CANIS & WEBEL, supra 774. page 219 decide the value of the dollar on Chrysler’s assets, and, specifically of the dollar. Nonetheless, the bailouts and restructuring programs encouraged by the government were adopted and, ultimately led to the recovery of these companies.
3. Corporate Strategy and GVC
The US auto industry has traditionally shared a close connection with the US government. “What is good for the country is good for General Motors—and vice versa,” pronounced Charlie Wilson, the former GM chief who became secretary of defense to President Eisenhower in 1953.794 This connection was never as clear as during the 2007-2008 financial crisis. The crisis revealed severe shortcomings in corporate governance, putting the existence of a key US industrial sector at risk. The political and social costs of a failed industry to the US government would, however, largely outweigh the administration’s interest to promote a free market and a clear non-interventionist approach to the economy.
Republican and Democratic administrations understood that existing corporate standards had failed to provide the checks and balances that companies needed in order to cultivate sound business practices; and identified an urgent need of government intervention to safeguard economic, social and political stability. The US’ government measures to protect the auto industry from failing are a clear example of the limits of the self-regulating market and of the different experience of States in attempting to cater to their own domestic economic needs. The relationship between corporate actors and the US government in the period of the financial crisis was one of clear dependency: a failure of the auto industry to support itself would seriously harm the interests of the US government. A refusal of the US government to support the Big Three automakers would lead to their downfall.
This Section outlines how the interests of the US government in preventing the automotive companies to fail took precedent over corporate autonomy and self-regulation in the post- crisis period. Unlike the case of Brazil (see Section A.4), the preservation of the domestic auto industry relied on the willingness of the US government to support it, rather than on the will of corporations to abide by the conditions imposed by the government as was the case with BMW in Brazil.
794 Geoffrey Norman, What’s Good for GM?, AM. SPECTATOR (Nov. 28, 2018), https://spectator.org/whats- good-for-general-motors. page 220
By fall 2008, the financial situation of the domestic auto-makers was so dire that they would soon be unable to make their wage and supplier payments. The auto industry executives attributed the grim state of affairs to macroeconomic conditions that were outside of their control. Industry representatives came to Congress to ask for unconditional loans to keep their production going. Chrysler CEO Robert Nardelli explained at the outset of the hearing, “We are asking for assistance for one reason: to address the devastating automotive industry recession caused by our Nation's financial meltdown.” 795 Big Three executives argued that the generalized lack of access to credit for buyers and dealers was there reason why the industry was failing to recover. 796
Contrarily, critics argued that the Big Three automotive companies had been poorly managed for decades. A straightforward comparison with foreign car factories producing in the US sufficed to demonstrate that the Detroit Big Three had not been competitive due to their own corporate choices. Foreign domestic producers such as Honda, Toyota, and Nissan, were expanding employment and production in the US. They opted to use predominantly non- union plants located elsewhere in South American countries. From 2000 to 2013, employment at the domestic transplant car-makers almost doubled to 163,000, while Big Three employment was cut nearly in half to 253,000, according to Automotive News data.797 This pattern suggested that the problems of the Big Three legacy US automakers were perhaps particular to those firms, not to the national automobile manufacturing industry. At that point in time, estimates of the hourly compensation of the Big Three automakers was almost 25 percent higher than in the transplants industries.798
In this context, Big Three industry leaders appealed to Congress and to the US administration. The CEOs of the Big Three and the president of the UAW appeared before the Senate Committee on Banking, Housing, and Urban Affairs and before the House
795 Examining the State of the Domestic Automobile Industry–Part II: Hearing Before the S. Comm. on Banking, Hous., & Urban Affairs, 110th Cong. (2008) (testimony of Mark Zandi, Chief Economist, Moody's Analytics); Stabilizing the Financial Condition of the American Automobile Industry: Hearing Before the H. Comm. on Fin. Services, 110th Cong. (2008) (testimony of Robert Nardelli, Chief Executive Officer, Chrysler LLC). 796 Id. 797 Diana Kurylko, Transplants Keep Rolling in North America, AUTOMOTIVE NEWS (Apr. 22, 2013), https://www.autonews.com/article/20130422/OEM01/304229996/transplants-keep-rolling-in-n-america. 798 David Leonhart, $73 an Hour: Adding It Up, N.Y. TIMES (Dec. 9, 2008), https://www.nytimes.com/2008/12/10/business/economy/10leonhardt.html. page 221
Committee on Financial Services requesting urgent emergency aid in November 2008.799 Chrysler and GM executives asked for short term loans to fulfill their contracts with suppliers and pay workers’ salaries. Though ultimately Ford decided not to request government money, Ford’s CEO accompanied Chrysler and GM in their request to Congress. Ford realized that a default by one of the other Detroit carmakers could have serious repercussions for its own activities. Due to the tightly connected linkages with shared auto parts suppliers, Ford’s production would be negatively affected should Chrysler and GM fail.800 In previous years, even modest supplier disruptions or specific parts shortages had caused widespread disruption to the production lines of car manufacturers of automakers across the board. If auto suppliers failed because of lost demand from a Chrysler liquidation, it could easily disrupt the other producers in the US. Fearing a chain reaction, Ford argued for their competitors GM and Chrysler to receive bailouts on the grounds that their failure would endanger Ford's own production.801
The CEOs initially failed to make a compelling case and their request for financial help was not well received audience on Capitol Hill. Klier and Rubenstein narrate that representatives were not sympathetic and denied the industry’s requests. 802 Reports had indicated that the three CEOs had flown from Detroit to Washington on three private jets. Representatives commented on the “delicious irony in seeing private luxury jets flying into Washington, D.C., and people coming off of them with tin cups in their hand, saying that they’re going to be trimming down and streamlining their businesses.”803
One month after the initial request was denied by Congress, in December 2008, the Big Three CEOs made their way back to Washington, D.C. and to the Congressional committees. The government had started to fear a major economic crisis if the companies were allowed to fail. The companies would have to lay off their workers immediately. 804 Reports of widespread
799 BILL CANIS ET AL., CONG. RESEARCH SERV., R40003, US MOTOR VEHICLE INDUSTRY: FEDERAL FINANCIAL ASSISTANCE AND RESTRUCTURING (May 29, 2009), http://www.fas.org/sgp/crs/misc/R40003.pdf. 800 The Motor and Equipment Manufacturers Association submitted data showing that 66 percent of Chrysler suppliers were also suppliers to GM and 54 percent were suppliers to Ford. See Goolsbee & Krueger, supra note 771, at 15. 801 Id. 802 Thomas Klier & James Rubenstein, Restructuring of the US Auto Industry in the 2008-2009 Recession, 27 ECON. DEV. Q. 144 (2013). 803 Josh Levs, Big Three Auto CEOs Flew Privatejets to Ask for Taxpayer Money, CNN (Nov. 19, 2008), http://www.cnn.com/2008/US/11/19/autos.ceo.jets. 804 Goolsbee & Krueger, supra note 776, at 14. page 222 spillovers into supplier industries and auto dealerships were emerging, and the knock-on macroeconomic effects through a reverse multiplier worried lawmakers. At that point in time, the Congressional Oversight Panel called the companies’ possible collapse “a potentially crippling blow to the American economy that Treasury estimated would eliminate nearly 1.1 million jobs.”805 Other estimates suggested that the near-term jobs at risk from a disorderly liquidation could reach as high as 2.5 to 3.3 million jobs.806 Large suppliers of seats, electrical systems and other components normally supplied multiple car companies, and many of the largest auto suppliers such as Lear, American Axle, and Visteon were also in dire financial shape. Hundreds of suppliers were known to be teetering on the edge.807 This time around, Congress warmed up to the automakers’ requests.
Further, the administration feared that job losses of such magnitude would impose sizable costs on various levels of government, through the need for additional spending on safety net, health care, unemployment insurance and other programs. Additionally, the companies’ pension funds would also risk bankruptcy transferring tens of billions of dollars in pension liabilities would be transferred to the Pension Benefit Guaranty Corporation, which was itself already in a precarious financial position. In considering the costs and benefits of a rescue plan for GM and Chrysler, the US government acknowledged that the alternative of just letting the companies proceed into bankruptcy would potentially be more costly.
The final decision of the US administration and Congress to rescue and restructure GM and Chrysler marked a bi-partisan understanding of the limits of the market and the need of government support when essential interests were at stake. President Bush stated that “government has a responsibility not to undermine the private enterprise system ... [but if] we were to allow the free market to take its course now, it would almost certainly lead to
805 CONGRESSIONAL OVERSIGHT PANEL, 111TH CONG., SEPTEMBER OVERSIGHT REPORT: THE USE OF TARP FUNDS IN THE SUPPORT AND REORGANIZATION OF THE DOMESTIC AUTOMOTIVE INDUSTRY (2009). 806 Examining the State of the Domestic Automobile Industry–Part II, Hearing Before the S. Comm. on Banking, Hous., & Urban Affairs, 110th Cong. (2008) (testimony of Mark Zandi, Chief Economist, Moody's Analytics); SEAN MCALINDEN ET AL., CTR. FOR AUTO. RESEARCH, CAR RESEARCH MEMORANDUM: THE IMPACT ON THE U.S. ECONOMY OF A MAJOR CONTRACTION OF THE DETROIT THREE AUTOMAKERS (2008); ROBERT E. SCOTT, ECON. POL’Y INST., WHEN GIANTS FALL: SHUTDOWN OF ONE OR MORE U.S. AUTOMAKERS COULD ELIMINATE UP TO 3.3 MILLION U.S. JOBS (EPI Briefing Paper No. 227, 2008). 807 David Kiley, Billions for Auto Suppliers’ Bailout, BLOOMBERG (Mar. 19, 2009), https://www.bloomberg.com/news/articles/2009-03-19/billions-for-auto-suppliers-bailout; John Stole & Jeffrey McCracken, Bankruptcy Fears Grip Auto-Parts Suppliers, WALL ST. J. (Jan. 26 , 2009), https://www.wsj.com/articles/SB123293545935214449; Susan Helper, Presentation at the Federal Reserve Bank of Chicago Conference, After the Perfect Storm: What's Next for the Auto Industry: Parts: Managing the Supply Chain, (May 10, 2010), www.chicagofed.org/digital_assets/others/events/2010/automotive_perfect_storm/helper.pdf. page 223 disorderly bankruptcy and liquidation for the automakers”.808 The White House fact sheet that accompanied the announcement stated that “the direct costs of American automakers failing and laying off their workers in the near term would result in a more than 1 percent reduction in real GDP growth and about 1.1 million workers losing their jobs, including workers for automotive suppliers and dealers” 809 A few years later, in an interview in the Detroit News, President Obama would confirm the decision by both administrations this way: “There was clear-eyed recognition that we couldn't sustain business as usual. That's what made this successful. If it had been just about putting more money in without restructuring these companies, we would have seen perhaps some of the bleeding slowed but we wouldn't have cured the patient.810
In recognizing the limits of these corporations, the US government went further than providing aid or incentives to rescue production. The government effectively stepped over the public- private divide by owning a majority stake in major private companies. In doing so, it spelled out a number of concessions for the stakeholders. Restrictions811 were placed on executive compensation and privileges, including pay, bonuses, golden parachutes, incentives, and benefits. Executives were restricted from compensation agreements that would encourage them to take “unnecessary and excessive risks” or to manipulate earnings.812 Compensation was to be reduced by December 31, 2009, and work rules were to be modified, to be equivalent to those of foreign-headquartered assembly plants in the United States. Half of the future contributions to the planned voluntary employee's beneficiary associations (VEBAs) were to be made with company stock holdings. Unsecured public claims were reduced by at least two-thirds and no dividends were to be dispersed while government loans were unpaid. New agreements with auto parts suppliers were to be signed to lower costs and capacity.
The governments’ corporate strategy changed more than the rules for running these companies. In 2014, when asked what had changed at Chrysler, Fiat CEO Sergio Marchionne responded: “The culture; the technology that’s in place; the way in which the cars are manufactured; the attitude of the workforce; the efficiency; the land speeds; the output of the
808 STEPHEN COONEY ET AL., CONG. RESEARCH SERV., R40003, US MOTOR VEHICLE INDUSTRY: FEDERAL FINANCIAL ASSISTANCE AND RESTRUCTURING 8 (Jan. 30, 2009), https://digital.library.unt.edu/ark:/67531/metadc83892. 809 Id. 810 Goolsbee & Krueger, supra note 776, at 31. 811 COONEY ET AL., supra note 808. 812 Id. at 42–43. page 224 system has completely changed. I mean, if you took a Japanese guy into our plant today he’d be impressed.” Marchionne offered a simple explanation for why Chrysler was able to change so quickly: “I know that when you’re broke you change your ways a lot faster.”813
It is hard to argue that this decision did not deliver important economic benefits to the recovery and country. Treasury recovered a total of $39.7 billion from its investment of $51.0 billion in GM. By the end of 2014. In May 2011, Chrysler repaid its outstanding TARP loans six years ahead of schedule. Chrysler returned $11.2 billion of the $12.5 billion it received through principal repayments, interest, and cancelled commitments, and the Treasury fully exited its connection with Chrysler. 814 Although the government did not recover the full amount of TARP funds it invested, if Chrysler and GM had been allowed to fail, in all likelihood the Great Recession would have been deeper and longer. Some of this improvement resulted from actions the auto companies directed by the US governments, some happened because consumer demand for autos has been especially strong during the last five years.815 Either way, the government’s choice to take corporate management into its own hands was more successful than almost anyone predicted at the time.816
4. Standards and Informal Regulations
In addition to the unprecedented bailouts of General Motors and Chrysler, government intervention in the auto industry in early 2009 also included the Car Allowance Rebate System (CARS), more commonly known as “Cash for Clunkers” program. Coupled with the strategic investments in green energies and targets for greenhouse gas emissions and fuel consumption included in the American Recovery and Reinvestment Act of 2009 (“Recovery Act”), the government’s recovery plan for the auto industry imposed a wide array of standards that the automakers would now need to abide by. The Section below sets out this aspect of the US’ recovery plan for its automakers.
813 Sergio Marchionne, CEO, Chrysler, Grp., Question and Answer Session at the Brookings Institute: Recovery Road? An Asessment of the Auto Bailout and the State of U.S. Manufacturing (May 21, 2014), https://www.brookings.edu/wp-content/uploads/2014/05/20140521_auto_bailout_transcript.pdf. 814 Goolsbee & Krueger, supra note 776, at 30 815 Id. at 31. 816 Id. at 29. page 225
a. The Stimulus for Fuel Efficiency: Car Allowance Rebate System (CARS)
The Cash for Clunkers was a government program administered by the National Highway Transportation Safety Administration (NHTSA) “that allowed consumers to trade in an older, less fuel-efficient vehicle for a voucher to be applied toward the purchase of a newer, more fuel-efficient vehicle.”817 President Obama signed into law the legislation approving the CARS program on June 24, 2009. The program began operation on July 24 and ended on August 24, 2009. It provided car dealers with a $3,500 to $4,500 credit for every trade-in of a less fuel-efficient vehicle for a more fuel-efficient vehicle, and the specific amount of the credit depended on the fuel efficiency improvement of the exchange.818 The CARS program was intended to stimulate the sales of new vehicles to counter the recession and to reduce emissions from existing vehicles.819
With regards to the expected economic effect of increasing auto sales, the program boosted auto sales during the two months of the program.820 In fact, “light vehicle sales temporarily jumped to 14.2 million units, measured at a seasonally adjusted annual rate, in August 2009, up from July’s 11.3 million units”.821 These additional purchases, however, were mostly “pulled forward from the very near future”, and by March 2010 the net effect of the program on auto sales had been “almost completely reversed”.822 In addition to finding that the effect on auto purchases was significantly small and short-lived, scholars have also questioned the program’s additional economic effects. According to Mian and Sufi, there is “no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.”823
The second expected effect of the CARS program was to reduce carbon emissions by replacing older vehicles with newer, more fuel-efficient vehicles. According to a University of Michigan study, “the program improved the average fuel economy of all vehicles
817 HUFBAUER & SCHOTT, supra note 765. 818 Atif Mian & Amir Sufi, The Effects of Fiscal Stimulus: Evidence from the 2009 “Cash for Clunkers” Program 7 (Nat'l Bureau of Econ. Research, Working Paper No. 16351, 2010), https://www.nber.org/papers/w16351. 819 TED GAYER & EMILY PARKER, BROOKINGS INST., CASH FOR CLUNKERS: AN EVALUATION OF THE CAR ALLOWANCE REBATE SYSTEM 9 (2013). 820 Id. at 3. 821 Id. at 43. 822 Id. at 16. 823 Mian & Sufi, supra note Error! Bookmark not defined.. page 226 purchased by 0.6 mpg in July 2009 and 0.7 mpg in August 2009.”824 Overall, the fuel economy and reduction in emissions that resulted from the program were relatively small. Despite being considered more cost-effective than other environmental policies such as tax subsidies for electric vehicles or tax credit for ethanol, the “cost per ton of carbon dioxide reduced from the program suggests that the program was not a cost-effective way to reduce emissions”.825
b. Clean Energy Standards and the American Reinvestment and Recovery Act (ARRA)
In addition, the American Reinvestment and Recovery Act (ARRA) of 2009 also provided indirect benefits to the auto industry. To stimulate the US economy and provide a foundation for long-term economic growth, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”) provided a wide array of policy instruments, including strategic investments in clean energy.826 Through the Recovery Act, over $787 billion in funding were invested in the American economy.827
The Recovery Act included the investment of over $2 billion in advanced battery and electric drive component manufacturing, which are expected to produce enough batteries and components to support 500,000 plug-in and hybrid electric vehicles.828 Complementary to the Recovery Act, the Advanced Technology Vehicles Manufacturing (ATVM) program is providing over $2.4 billion in loans to Fisker, Nissan, and Tesla to support three of the world’s first electric car factories in Delaware, Tennessee, and California.829
Through the auto deal, fuel efficiency standards were strengthened in the United States. Before 2009, “the auto industry was facing three different sets of vehicle standards: federal fuel economy standards set by NHTSA in mpg, federal GHG standards set by EPA in gallons
824 MICHAEL SIVAK & BRANDON SCHOETTLE, UNIV. OF MICH. TRANS. RESEARCH INST., THE EFFECT OF THE “CASH FOR CLUNKERS” PROGRAM ON THE OVERALL FUEL ECONOMY OF PURCHASED NEW VEHICLES (2009). 825 Gayer & Parker, supra note 819, at 12. 826 Joseph E. Aldy, A Preliminary Review of the American Recovery and Reinvestment Act’s Clean Energy Package 1 (Harv. Kennedy Sch. Faculty Research Working Paper Series, Working Paper No. RWP11-048, 2012). 827 EXECUTIVE OFFICE OF THE PRESIDENT, THE RECOVERY ACT: TRANSFORMING THE AMERICAN ECONOMY THROUGH INNOVATION (2010). 828 BILL CANIS & BRENT D. YACOBUCCI, CONG. RESEARCH SERV., R42064, THE ADVANCED TECHNOLOGY VEHICLES MANUFACTURING (ATVM) LOAN PROGRAM: STATUS AND ISSUES (Jan. 15, 2015), https://www.everycrsreport.com/reports/R42064.html. 829 Id. page 227 per minute (gpm), and separate GHG standards set by California, which thirteen other states had adopted”.830
In May 2009, President Obama announced a new national auto policy that would increase fuel economy and reduce greenhouse gas pollution for all new cars and trucks sold in the United States.831 The EPA and the National Highway Traffic Safety Administration (NHTSA) subsequently issued a joint final rule under the Energy Policy and Conservation Act of 1975 (EPCA) and the CAFE standards to implement a coordinated national GHG and fuel economy program for light-duty vehicles (passenger cars, light-duty trucks, and medium- duty passenger vehicles) establishing standards for model years 2012 through 2016. These national programs are intended to avoid conflicting requirements through regulatory convergence of the GHG and fuel economy standards established by US federal and various state governmental authorities.
5. Case Study Conclusions on the United States
The experiences of the measures for the automotive industry in the US were significantly different than that of Brazil (see Section A). While the Brazilian case study exemplified different regulatory levels that simultaneously operated to constrain the universe of options that were available to the Brazilian government to safeguard its industry in times of crisis, the American case example shows a different dynamic.
As observed in the first US case study, the logic of policy making in the US operates in a much more articulated fashion between public and private sector as well as technical, research and educational institutions. This logic was repeated and developed during the scenario of the financial crisis. When investigating the domestic regulatory level the manners in which its overlaps with the corporate strategies of large firms, the case study suggests that the governmental ability to regulate was not largely shaped by the priorities of the automakers. Quite the opposite.
The automotive industry had been severely affected by the tightening of credit caused by a subprime-lending crisis in the United States. Demand for automobiles had fallen sharply all over the globe, and sales plummeted to a three-decade low in 2011. In this sense, the US
830 Jody Freeman, The Obama Administration’s National Auto Policy: Lessons from the Car Deal, 35 HARV. ENVTL. L. REV. 343, 346 (2011). 831 Press Release, The White House, President Obama Announces National Fuel Efficiency Policy (May 19, 2009), http://www.whitehouse.gov/the-press-office/president-obama-announces-national-fuel-efficiency-policy. page 228 government had social and political interests in preventing the automakers to fail. The efforts to do so were such that the TARP provisions were interpreted to understand that the auto companies qualified as agents capable of affecting the country’s financial systemic instability and were, therefore, qualified to receive US government loans. The definition of ‘troubled asset’ under the category “any other financial instrument” was very broadly determined to include the “equity of private firms” under Section 3(9) (B) of the Act. The health of the financial system was thus tied to the US domestic automotive manufacturers due to their size and systemic importance for the economy. Not only did the government create an oversight committee to supervise, review and approve the management, restructuring and business plans of the companies, it created limited liability companies on behalf of Chrysler and GM to manage the funds allocation to the specific suppliers of each company. Further, the restructuring of Chrysler and GM were allowed to proceed through an alternative provision under Chapter 11 of the Bankruptcy Act. Under Section 363, a bankrupt company would be allowed to act quickly to transfer intact, valuable business units to a new owner, as opposed to the conventional “debtor-in-possession” financing bankruptcy process requiring restructuring of a corporation as a whole.
It was only with government assistance that the automotive industry recovered after the recession. The measures implemented, however, were not limited to auto industry support. They blurred the distinction of public and private interest by transferring to the US government the authority to conduct corporate firms, design strategies and manage their recovery. The US government became the de facto manager of Chrysler and GM, restructuring them to protect public interest, guarantee jobs, welfare benefits as well as environmental goals.
Internationally, the case raised concerns among the US WTO partners as well as it NAFTA neighbors. Though there were concerns regarding the scope of the respective provisions under the government procurement obligations, the measures were effectively unchallenged under those provisions. An overwhelming fear of throwing the first stone in a policy to address the hardships caused by the global financial crisis also seemed to play a role in keeping these charges from being brought formally to the WTO.
The choice of financial mechanisms chosen as a bail out for the industry also posed a new obstacle for a WTO dispute. The novelty of the claim, the high degree of technicality and specialization combined with the theoretically limited period of attribution made the initiation page 229 of a dispute unlikely, opposing the case of Brazil. Importantly, the trickle-down effect that the bankruptcy of these major car makers would have not only to the US economy but also to the global production chains came to be an important consideration for countries studying the possibility of filing a dispute.
Another example of different institutional experiences between the two countries during the global financial crisis relates to the operation of regulatory standards created in the United States and in the European Union regarding fuel efficiency and gas emissions. The INOVAR- AUTO regime explicitly drew from European regulations when it came to fuel efficiency standards, importing the EU’s regulatory goals but with a one year delay – meaning that in 2017 Brazilian legislation would be equivalent to that of the EU in 2016. Similarly, for carbon emission standards, besides voluntarily adopting the global targets and baselines set out in the United Nations Framework Convention on Climate Change (UNFCCC) at the 15th Conference of the Parties (COP-15) in Copenhagen, Brazil openly endorsed the EU’s directive for fleet average CO2 emissions of 130g CO2/km or less by 2015.
The softer regulatory environmental requirements that automakers had to face in Brazil as opposed to the European Union or the United States also meant that technology to reach these standards would not have to be the same as in the cutting-edge markets. It also meant that the required technology and skills to produce the latest fuel efficient and environmentally friendly cars would also not need to be exported to Brazil. In effect, it contributed to different production standards and levels of industrializations that has been created and supported by the current institutional arrangements embedded in global trade rules.
To conclude, it is interesting to note that the major hurdles faced by the US government in devising a plan for the auto sector during the crisis came with even more profound intervention in the industry – taking over the management of domestic corporations firms themselves. The relationship between the government and the corporation was opposite to that observed in Brazil. The corporations’ dependence on the US’ government to rescue them after the crisis was such that they effectively handed over control of their business to the government. Besides avoiding bankruptcy, they also became agents to fulfil the US government’s social, economic and political interests during and after the global financial crisis. page 230
A. A Comparative and Distributional Analysis of Policy Space for Chapter IV
The case studies above offered a realist perspective on the web of regulations that operate to constrain and restrict countries economic policies. They showed how institutional preferences were manifested not only at the international level but, importantly, also were determinative in other levels and regulatory frameworks. The conclusions to both of these case studies show that international trade agreements are not the only, or most important, factor constraining and shaping the conduct of development policy. Indeed, other regulatory frameworks such as domestic institutions, regional deals, supply chain governance structures, and informal regulations need to be taken into account. These insights are crucial to understanding how countries decisions are differently regulated within the global trading system and what options are available to them at each point in time. The comparative examples of Brazil and the US exemplified the different restrictions or allowances each country experienced in a set regulatory context, influencing the effectiveness and permissiveness of their policies.
This final Section of the Chapter moves on to the second contribution of the thesis. It analyses how the constellation of regulatory influences present in each case study described above has different distributional implications for each country. That is to say, the manifestation of regulatory autonomy within the trading system as whole has important parallels with how international trading rules effectively translate to each country.
a. Policy Space and the Dynamic of Differences
The last two Chapters have demonstrated the auto industries in Brazil and in the United States have long depended on different forms of governmental intervention. Nonetheless, the Chapters have also shown that the way in which each government implements measures for its industry is substantively dissimilar. The different forms of support for the industry relates not to the degree of government intervention in the economy, but rather, to the design of the measures implemented by each country. The measures implemented during the post-crisis period respond to domestic needs of two auto industries in different development stages, diverse power dynamics with other agents in the production chain as well as differentiated relationships within the structure of each country. These factors led to different degrees of implementation and of success of each policy. While the INOVAR-AUTO policy in Brazil was carved by pressures from different regulatory levels and ultimately struck down by the page 231
WTO DSS, the comprehensive corporate take-over of GM and Chrysler by the US government was not passive of challenge. The different power dynamic can be explained by the origin of these firms, their needs in each country as well as the extent to which they coincided with the different goals that the Brazilian and the United States government had in putting in place measures for their domestic industries.
One of the interesting perspectives that Anghie’s dynamic of differences theory (see Chapter I) provides is how institutional possibilities were open for each country in the post-financial crisis context. As previously noted, in the two timeframes under analysis, Brazil and the US experienced different sets of regulatory influences curtailing their ability to implement or draft policies. The current case studies, however, showed more than this original consideration. They illustrated how rules and standards operate through value chains to impose different conditions on players across the globe.
The Chapter shows how the issue of government intervention and policy autonomy to regulate became blurred in a crisis. Non-market intervention and neoliberal rules that guide the workings of the global trading system found clear limits when it came to the United States. This is true both because of the impact the firms had on production chains throughout the globe as well as the importance of preventing the United States crisis to worsen and further reverberate across the globe. As a result, the idea of a ‘dynamic of difference’ shows the institutionalization of an international system that creates a notion of sovereignty and international rights that empowers practices of actors in certain positions of power while forbidding the same practice of actors in different positions. The comparative case with Brazil, a country with no large national carmakers, shows how the ‘acceptable rules’ for the industry affect both countries in different ways.
In the case of the US’ policies, the government and the automotive industry worked to set up bailout funds, favorable loans, restructuring plans and environmental standards aligned with the deal made between the US government and domestic industry leaders. Domestic impediments, therefore, emerged from this umbrella agreement to promote the industry nationally. The story in Brazil was rather different. From day one of the implementation of the IPI regimes, there was pushback from states that hosted large foreign automakers. The initial battle over the adequacy of the sudden increased IPI rate was also a battle among the national government and the state governments as well as political parties representing the interests of Chevy Motors, Venko Motors among others. The difference here matters in terms page 232 of which industries had effective power to influence constitutional interpretation at the Brazilian Supreme Court and which role that firm played in Brazil. Importantly, which type of activity was undertaken in the country (i.e. assembly, design, research, supplies manufacturing etc.).
Another example of changing economic and institutional differences can be picked out of the US case study. The choice for rigidly regulating several measures as protectionist in the GATT and regulating other types of measures more broadly is related to the utility of the use of the latter by the countries that eminently held up the system. As such, the choice of instrument to combat the negative effects of the financial crisis varied depending on the compatibility between the condition of state aid, the source of the structural problems and the restrictions to implement such measure.
The US government expedited the restructuring of the industry by tying state aid to job cuts and reductions in benefits, while Brazil opted to subsidize domestic industry through national strategies in the form of taxing or restricting market access to foreign industries. Undoubtedly, the source of industry problems in each country was different and the measures to address each of the structural problems faced softer or tougher WTO regulation. While the bailouts of domestic automakers against transplants were seemingly discriminatory; however, whether they were or not consistent with WTO rules depended on an impact that is not immediately measurable. In addition, the wide use of state intervention made the mercantilist practice a new equilibrium and aggravates the collective action problem. In the Brazilian case example, the measures taken were historically more disputed at the WTO because of its clear negative cross-border spillovers, compared to the institutional arrangements and strategies of subsidizing domestic industries in the US.
The different role performed is emblematic of the power relationships held in the global automotive value chain as well as the locale attributed to firms based in Brazil. Arguably, although the firms produced automobiles in Brazil, the foreign ownership and corporate strategy that guided them was exogenously looking. This is crucial when the matter at hand translates into protecting and minimizing damage on domestic producers and consumers from a global crisis. This difference is emblematic in light of the persisting dynamic of differences narrated by Anghie in Chapter I in the workings of contemporary trade and global value chains. page 233
The case study shows that corporate strategy became embedded in the approved government plans with pre-determined conditionality, investment plans, management oversight, as well as projects for research and development. Different then Brazil, where automakers were of a foreign origin and largely dictated the exceptions and the rules for Brazilian law, in the US the case study showed that the power firms exert depends on the position they take up on value chain: as rule-setters, as collaborators for rules, or as beneficiary of rules.
b. Institutional Preferences and Global Distributive Consequences
As explained in Chapter I, trade rules were created to apply universally to countries in different modes of development. In the postwar system, they applied to countries seeking to rebuild their industrial economies, to agricultural economies and to developing countries alike. The institutionalization of these rules in the trading system, with a few exceptions (refer to Chapter I), also meant that a core group of rules and institutions were privileged in light of others. Effectively, the consequence of the legalization of one type of economic arrangement and institutional structure was a disproportionate benefit to countries, sectors and actors that already had a head start in that economic and institutional arrangement.
The example of BMW in Brazil serves as an example of how regulatory options are gradually formed across the globe and how they have a direct impact in income and profit distribution among different players within the trading system. A clear example of this was the way in which BMW influenced, directed and shaped the INOVAR-AUTO regime in Brazil. It exemplifies how large multinational companies, through their corporate decisions, can shape countries’ domestic regulations, influence economic policies and call for a re-discussion of previous regulatory choices. The example of BMW in Brazil shows the extent to which the Brazilian government was willing to include BMW in its meetings, discussions and processes so as to make sure the company would follow through with its investment. A large company such as BMW has the power to significantly alter economic perspectives for a whole industrial sector, bringing technology, investment, personnel, research and know-how to the country. Further, it can significantly alter the reality of the municipality in which it locates and give rise to new industrial conglomerates, creating thousands of direct and indirect jobs.
Brazil’s realization of these facts put BMW at the heart of the negotiation process for the novel automotive regime. Effectively, Brazil chose not to consider regulatory options that were not in accordance with BMW’s expectations and could amount to the loss of their page 234 investment. The government reevaluated the 2011-2012 IPI Tax Hike in light of BMW’s skepticism and unwillingness to carry out its plans under the proposed tax changes. As such, the Brazilian case study of the INOVAR-AUTO regime is especially illustrative of how corporate decisions influence not only the text and the limits of the law but also the very range of economic choices and developmental decisions that the government may take. Crucially, the distribution of power illustrated in the BMW case also converts into different distributional outcomes within the value chain and among the countries operating and trading within this system.
Even more specifically, the inclusion of a carve-out for niche vehicles in the INOVAR- AUTO regime, the premium segment market established after extensive negotiations with BMW executives, went arguably against the overall economic logic of the program: to focus production processes nationally in order to increase domestic productivity and modernize the Brazilian automotive sector. The exception was legally framed as a third category for foreign investors, allowing them to qualify for the tax offset offered by the regime without undertaking the complex requirements imposed on domestic producers and on importers. The measure added in agreement with BMW contributed to a number of investment decisions by other international companies that chose to move production to Brazil from other parts of the world, including from the European Union. As Mr. Thomas Schmall, former President of Volkswagen Brasil, noted regarding Audi's plan to start manufacturing in Brazil, “[w]ith INOVAR-AUTO, producing in the country became necessary, because it is possible to import the same model (without the IPI surcharge) for 24 months before starting its production here”.832
Interestingly, the use of financial bailouts and state-defined goals for corporate restructuring of Chrysler and GM showed a different relationship between the state and industry in the case of the United States. The domestic and global importance of the US auto-industry allowed for a series of state-led measures to prevent the manufacturers from collapsing. Failure of the US Big Three would reverberate beyond the US economy to global production chains. In the middle of the crisis, there was little appetite to contest these measures domestic or internationally. As noted by Trebilcock and Howse, the system’s foundation in unjust power relationships acts to recreate artificial comparative advantages in global trade. The power
832 Pedro Kutney, Volkswagen Pode Elevar Investimento no Brasil e Voltar a Fabricar Carros da Audi no Paraná, AUTOMOTIVE BUS. (Mar. 18, 2013), http://www.automotivebusiness.com.br/noticia/16554/volkswagen- pode-elevar-investimento-no-brasil-e-voltar-a-fabricar-carros-da-audi-no-parana. page 235 experienced by each country in responding to the auto industry crisis, therefore, can also be seen as a product of the creation of an artificial comparative advantage that placed countries’ industries in different points in the global production chain.
The case study shows how the lines between state and market institutions became blurred in the case of the US when compared to that of Brazil. Domestically, the US government took over the management of private corporations to guarantee the functioning of the market economy and to achieve its societal goals. As related by Cohen, the government acted as the guarantor of the right to property (i.e. to sell and buy products) reflecting its own objectives and societal priorities. Likewise, international institutions built upon a different paradigm of state-market relations operated to prevent the collapse of the market they are embedded in by allowing for the rescue of the US automotive industry, and consequently, the recovery of the US economy.
As such, in the case of the United States, state intervention coexisted with liberalization, internationalization, and freer markets. Just as Polanyi’s Great Transformation demonstrated how “regulation and markets, in effect, grew up together”833 the case of the United States shows how free market capitalism requires extensive and continuous state intervention. From a Polanyian perspective, state intervention is necessary for the governance of, indeed the existence of, markets. “No market economy separated from the political sphere is possible”.834 Thus, there is no contradiction between the coexistence of new and even rising levels of state activism and market liberalization at both the international and domestic levels. As Jonah Levy puts it, “while old forms of state intervention may be discredited and cleared away, new interventions often emerge to take their place. The state also rises.”835 Levy identifies “new missions” of state activity. These missions, moving from “market direction” to “market support,” may be “corrective” or “constructive”; in each case, what is at hand is “the state’s innovative capacity […] forging new state policies and regulations for a new competitive environment.”836 Thus, “market support is not synonymous with state
833 Polanyi, supra note 215, at 71. 834 Polanyi, supra note 215, at 205. 835 Jonah D. Levy, The State Also Rises: The Roots of Contemporary State Activism, in THE STATE AFTER STATISM: NEW STATE ACTIVITIES IN THE AGE OF LIBERALIZATION 1, 2 (Jonah D. Levy ed., 2006). 836 Id. at 3. page 236 withdrawal,” rather “the move towards the market has generated a raft of new state missions.” 837
c. Depoliticization of Trade Law and the Role of Experts
The state-centered idea of trade policy-making is one that hides important moments of economic and political power in trade relations. The attempt to separate diverse legal regimes and forms of regulation is also an attempt to unpack many of the political forces that shape decisions behind the well-lit stage of interstate trading relations. Kennedy’s idea of the ‘rule of experts’ and the politics of expertize outlined in Chapter I suggest economic and political decisions are often made behind the stage. The example of the creation of automotive policies and their relationship with the trading system made Kennedy’s idea explicit in several moments.
Regionally, the negotiations with Brazil’s bilateral and regional trading partners led to a reconceptualization of the Brazilian automotive policy to redistribute the benefits of the program more equally with MERCOSUR members and Mexico. In economic terms, it meant adopting a different strategy for what was considered to be the right approach to the industrial development of the Brazilian auto industry at that point in time. Legal and political pressures led to a considerable detour from the originally conceived developmental and industrial policy. The regional carve-outs were reconceived as part of INOVAR-AUTO’s development strategy and as an attempt to structure and strengthen different parts of the production chain within the region. In this sense, institutional options that were initially made were modified by negotiators, lobbyists, firms, in the name of a ‘regional development strategy.’
Domestically, the legal interpretation of what constituted “serious harm to the public order and economy”838 in Brazilian legislation determined whether the government could or could not implement immediate tax alterations. Important in analyzing this discussion is the attempt to map the political bias of the Court’s decision and the “commonsensical” narrative that underlies it. Political parties and large corporations followed this Supreme Court case posing a new challenge to the regulatory autonomy of the Brazilian Government at the time. These
837 Id. 838 Freely translated from Portuguese: “Art. 4º Compete ao presidente do tribunal, ao qual couber o conhecimento do respectivo recurso, suspender, em despacho fundamentado, a execução da liminar nas ações movidas contra o Poder Público ou seus agentes, a requerimento do Ministério Público ou da pessoa jurídica de direito público interessada, em caso de manifesto interesse público ou de flagrante ilegitimidade, e para evitar grave lesão à ordem, à saúde, à segurança e à economia públicas.” page 237 groups engaged in background expertize decision making through the “logic of imminent threat” and the constant promotion of fear through the use of potential and imminent “catastrophes” as explained in Chapter I.
The Brazilian government claimed that there were exceptional circumstances that demanded such tax modifications for the automotive sector. The imminence of the threat was such that, instead of adopting trade remedies provided for in the WTO Agreement on SCM with a potentially higher trade-restrictive impact, Brazil argued that it chose to put in place positive incentives that were not protectionist in intent but rather aimed at promoting investment, innovation and research and development in a key industry.
The other claims disputed at the Brazilian Supreme Court at the time of the IPI regimes and the INOVAR AUTO program also led to significant legal discussions on what constituted “concrete economic harm”, shaping important value systems and power relationships for the actors involved. The contingent goals and desires of economic agents legally constituted competition relationships among companies and states in response to specific situations and contexts.”839 While the Supreme Court found that the trade deficit that prompted the government’s imposition of the IPI measure did not threaten “concrete harm to the Brazilian public order and economy,” it also understood that the surge of Asian imports was not harming the Brazilian market and upheld the constitutional holding period, thus exempting the Chinese automakers located in the State of Espírito Santo from the 90-day holding period.
The “logic of imminent threat” and “promotion of fear” became normalized as common trade talk after 2007. In the US, the impending catastrophe was such that, preempting the need for government rescue of the auto industry, President Obama leveraged the example of Japan during his first presidential news conference, asserting that
“We saw this happen in Japan in the 1990s, where they did not act boldly and swiftly enough, and as a consequence they suffered what was called the ‘lost decade’ where essentially for the entire 1990s they did not see any significant economic growth.”
839 Id. at 323 page 238
Fearing a similar outcome as the Japanese, Obama announced that government officials were hard at work to prevent similar long-lasting stagnation.840 The Japanese experience directly contributed to the policy prescriptions eventually adopted by the US Treasury. However, unlike Japan, US officials sought to quickly rectify problems in financial sector balance sheets. Stress tests were conducted to identify capital shortfalls and remove opacity from the financial system.
The reference to the impending economic catastrophe gained traction in the US. As opposed to the example of Brazil, where intervention was not justified given that there was no “serious harm” to the economy was found, the US Congress and Supreme Court identified space in existing legislation to justify the governmental support and management of private corporations. These findings not only blurred the boundaries regarding “what should or should not fall within the state’s domain, what is public and what private, what is and is not within the state’s competence.”841
The neoliberal paradigm of ‘governing too much’842 found different measures in the case of Brazil and the US. Practices adopted by the US redefined “the limits of governance” drawing the boundaries between the beginning and the end of state regulatory autonomy according to the actions of some States more than others. In this logic, once again, the international system pushed for specific uses of law as the standard of measure of legal-rational governance. It recriminated some policies in respect of others, regardless of their effects, their contextual appropriateness or historical sense. In this sense, the “liberal” approach to trade law or “protectionist” trade policies fails to convey the autonomy granted to different States within the trading system.
840 President Barack Obama, Press Conference at White House (Feb. 9 2009); cf. Laura Meckler & Johnathan Weisman, Obama Warns of “Lost Decade” – President Says Federal Government Is the Only Remaining Option to Jolt Economy, WALL ST. J. Feb. 10, 2009, at A1. 841 Wilkinson, supra note 194, at 29. 842 FOUCAULT, supra note 238, at 385. page 239
IV. THESIS CONCLUSIONS
This thesis is a behind-the-scenes story of policy space in the trading system. It provided three different theoretical perspectives to describe the complexities that lie beyond simple findings of conformity or breach of international trade rules. As a general contribution, the thesis traced a picture of how the concept of policy space misrepresents the complexity of the regulatory and ideological framework behind international trade legislation. It demonstrated that the concept naturalizes the idea of institutional neutrality and blurs the path for academics and policymakers to explore new avenues for more equitable distributional outcomes and power relations within the trading regime.
First, it explained that any assessment of regulatory autonomy in the trading system needs to take into account that the alleged institutional neutrality of the system is in itself a political choice. This political choice creates a distinction between formal and real autonomy between countries. The so-called ‘dynamic of differences’ was illustrated in the developing country struggle to carve out room for policy experimentation in a system based on different economic and ideological premises. Joining the GATT/WTO system meant abiding by a trajectory of economic development set out by a minority of developed countries. Within the same framework of formal rules, this set trajectory, in and of itself, guaranteed that policy space would be limited to what a select group of countries deemed to be sound economic policy. Formal autonomy under the law, therefore, would never be translated in equal autonomy among countries.
The policies imposed by Brazil and the United States in the early 1990s are an example of such difference of autonomy within the same international system. The establishment of foreign automakers in the Brazil in the 1990s inserted the country’s industry within the global automotive production chains. It explains, to a significant extent, the universe of policies available to the Brazilian government at the time, their feasibility and their effectiveness. The concentration of power with global carmakers on the high-value-added end of GVCs, allowed foreign corporations to shape local fiscal and industrial policies, labor relations, as well as the geographical organization of the domestic industrial sector. The example of the New Auto Regime shows the gradual dismembering of Brazil’s policies in different regulatory levels, ultimately being reshaped by the signing of a Memorandum of Understanding at the WTO.
In the case of the United States, the thesis showed how specific domestic legislation enacted changed the country’s ability to implement measures it deemed appropriate for its domestic page 240 industry regardless of the contours of international trade law. The United States Trade Act of 1974 through its Sections 301-310 was instrumental in defining what the US deemed “unreasonable” or “unjustifiable” in other countries’ regulations. The US perceived experience of regulatory autonomy, therefore, was a combined result of a specific feature of the US domestic legislation and the US’ strategic position as an economic powerhouse. The US’ managed trade policy remained at the margins of the system, technically escaping WTO rules while selectively opening markets around the globe according to the US’ economic interests.
In the post-crisis scenario, the case studies also illustrated a gap between what Brazil and the United States managed to exercise in terms of regulatory autonomy. In the height of the crisis, Brazil’s policies sought to make production more competitive and cost-efficient by promoting investment in training, research and development, and innovation. The attempt was curbed by the international system’s perception of what is an adequate path for development options; by domestic political interest groups largely reinforcing such perceptions and, importantly, the role that multinational corporation governance had in redefining the limits of the program.
Meanwhile, the auto industry bailouts and rescue measures in the United States showed a different reality. Unlike Brazil, the desired policy objective was not to invest in innovation, training, or research & development. Rather, the concern was systemic. The decades of support to the industry allied to high production costs pushed the industry to a competitiveness crisis different from that of Brazil. A substantial increase in the prices of automotive fuels discouraged purchases of heavy vehicles and pickup trucks produced by the Big Three. With fewer fuel-efficient models to offer to consumers, sales began to slide. By 2008, the situation turned critical as the credit crunch placed pressure on the prices of raw materials. The general economic downturn arguably worsened the automotive crisis and called for remedial actions in the form of short term loans, bailouts, and differentiated bankruptcy proceedings under State control. Government interventions blurred the distinction between public and private interest. The US government became the de facto manager of Chrysler and GM, restructuring them to guarantee jobs, welfare benefits as well as environmental goals. The global political and economic costs of reprehending these measures internationally were too high to pursue. The unprecedented context and legal page 241 intricacies ultimately distanced international complaints as trading partners chose to wait out the storm from a distance.
Second, the thesis showed that even though there have been attempts at reconstructing these institutional choices, they have been remedial at best. Over the decades, the trading system has lived through moments of pressures and pushes from countries that favored different institutional and economic arrangements. Nonetheless, different pathways for economic development remained, to a large extent, at the margins of the formal system. The case studies showed that pushes to normalize other institutional arrangements within the trading system were acceptable in remedial fashion and within certain confines of application. Precisely because the international trading system was shaped on regulatory and ideological preferences of a set number of countries, some domestic structures are better able to interact and respond with demands in the international trading system than others.
Through decades, the Brazilian government attempted to adapt its state-centric approach to industrial policy-making to avoid some of the stricter disciplines imposed at the international level. In the early 1990s, the organization of the State, as well as shared tax competencies and autonomy of each state, limited the government’s ability to implement its desired policy plan. In a time marked by market liberalization, inward-looking developmental policies did not survive the encounter with liberalization-oriented regulatory influences. In all four regulatory moments, international, domestic, corporate, and informal legal processes go beyond their original scope of jurisdiction, shaping and reflecting off of each other.
In the United States, the use of Section 301 by the US government influenced rules and standards that were being negotiated in the Uruguay Round. The transnational effect of the use of Section 301 extended further: it set out baselines that would be transnationally incorporated in regional and bilateral agreements across the globe as well as in domestic legislations of trading partners. The US’ understandings of “reasonable” and “just” measures implemented by other countries naturally reflected its own internal balance and domestic structures. These understandings served as baselines to establish the international regime on goods, services, intellectual property rights, and telecommunications consistent with the United States’ market understandings.843
843 Molyneux, supra note 485, at 132. page 242
In the post-crisis period, once again, institutional preferences rather than the extent of state intervention dictated the de facto acceptance of countries measures. The developmental approach of the Brazilian INOVAR-AUTO, focused on i) tax offsets to production processes taking place in Brazil; and ii) incentives to perform high value-added operation in the country. Such measures clashed with some of the stricter WTO disciplines, a political choice on the appropriateness of different regulatory instruments. Further, the need to attract investment during and after the financial crisis constrained the programs’ options to those that were in accordance with the expectations of specific foreign firms. The Brazilian case study of the INOVAR-AUTO illustrated how different power relationships within a global industry limit the very range of economic choices and developmental decisions that the governments can effectively implement. The distribution of power illustrated in the case of BMW in Brazil also showed how distributional outcomes are recreated through this set of regulatory possibilities left to Brazil within the trading system.
Meanwhile, the United States case study showed a different reality in the experience of policy space as it refers to country’s institutional preferences. The use of sparsely regulated measures internationally, such as financial bailouts and state-corporate restructuring showed a different relationship between international disciplines and the institutional measures implemented by the United States. The US measures revived the discussions on lack of clear distinction between trade and fiscal stimulus in the considerations of what were trade-related measures and what was the scope of global financial authorities in relation to the WTO. Second, in a context where ‘benefits’ through financial contribution and loans were implemented to achieve US key public policy priorities, the discussion of possible instruments of forbidden subsidies became sensitive. Last, due to the immensity of the companies involved, their global presence, as well as the exceptional circumstances of the crisis, contingent measures to protect the auto-industry, were implemented in most countries (see Chapter III.B.1). The design, type of the measures as well as the magnitude of the industry defined, once again, the de facto acceptability of the US’ policies.
Third, and last, the thesis offered a constructive approach to economic rationality by showing role of expertise in normalizing economic ideas and translating them into acceptable and non- acceptable policies. The thesis showed moments when techniques and practices of experts in the background of trade politics drafted the limits and the solutions to key international trade page 243 questions. During the early 1990s, the political influence of experts was observed in several key moments.
The power of expertise first became obvious when, in 1995, diplomats decided what was a “critical situation” under paragraph 9 of Article XVIII of the GATT to analyze whether the Brazilian balance of payment crisis merited the application of the imposed taxes. Later, in 2009, the US bailout measures revived the discussions. The lack of clear distinctions between trade and fiscal stimulus in the considerations of what were trade-related measures and what was the scope of global financial authorities posed a dilemma to experts. Ultimately, the Brazilian measures were struck down while the complexity and magnitude of the targeted US industry kept experts from passing judgment on their consistency with international trading rules. The episodes make clear the political role played by expertise in who defines what is a balance of payment crisis and how to regulate it.
Another similar example of the politics expertise work lies in the mandatory vs. discretionary discussion at the heart of the US managed trade policy in the 1990s. These policies operated to sustain and support the domestic and regional auto sector through an era of increased influx of automotive goods from Asia and from Europe. The effective implementation of US Section 301-310 measures against trading partners across the globe was based on a US interpretation of what were “unfair trading practices” or “unreasonable acts”. Though several countries noted that they did not accept actions the United States’ judgement on what configured “fair trading practices”, the Panel accepted US reassurances, that it would not exercise its discretion in a way that violated WTO Agreements.
In the post crisis scenario, the extent to which the government experienced its autonomy to push forward its developmental policy was reflected in the number of processes, adaptations, and changes that it tolerated when it came to the implementation of the INOVAR-AUTO regime. As demonstrated, these moments were not seen in foreground politics (regulations, public decisions, government actions, formal laws) but rather in background struggles in different levels of transnational regulatory processes. The expert battle to define what constitutes “serious harm to the public order and economy” in Brazilian legislation determined whether the government could or could not implement immediate tax alterations. Political parties and large corporations followed this Supreme Court case posing a new challenge to the regulatory autonomy of the Brazilian Government. In this moment, the political bias pushing for a specific “commonsensical” narrative of what should be an page 244 appropriate economic policy guided the Court’s decision. The distributive consequences of this decision were clear for carmakers pushing for the non-application of the IPI tax.
The rhetoric of “imminent threat” and “impeding fear” arising from unmet economic expectations was also a driver of legal and economic expert decisions in the US. As stated above (Chapter III.A.b), US Congress and Supreme Court identified space in existing legislation to justify the governmental support and management of private corporations and redesign the boundaries on what is “what should or should not fall within the state’s domain, what is public and what private, what is and is not within the state’s competence.”
This thesis shows that the essential task to policy-makers, researchers and academics is to change the focus of analysis from state actors engaging in negotiations to define trade rules to the backstage scenarios—the formal and informal regulatory pathways where such decisions are made on a daily basis in the global trading system. The continued work of legal experts entrenches these political and behavioral decisions in society and has important distributive consequences. By allocating the ability to produce specific goods to determinate countries, trade law also allocates relationships of power and institutional sovereignty across the globe. By legitimizing some trade instruments as opposed to others, it makes a political choice that shapes comparative advantages between countries and producers. In doing so, law propagates, shapes, and recreates important distributional choices in the background of political decision making. The value of this work also lies in revealing how day-to-day background operations within the international trade system result in a pre-selected range of ideological, political and economic choices within a much broader universe of possibilities even before the engagement of governments and other international actors.844As Sinclair puts it, “problematizing these moments suggests that contemporary forms of international intervention are less inevitable than they may currently appear.” 845
844 DAVID KENNEDY, A WORLD OF STRUGGLE: HOW POWER, LOVE, AND EXPERTISE SHPAE GLOBAL POLITICAL ECONOMY 171 (2016). 845 On genealogy and histories of the present see, e.g., KOOPMAN, supra note 249; Bevir, supra note 249, at 423; Castel, supra note 249, at 237. page 245
LIST OF ABBREVIATIONS
Abbreviation Description ANFAVEA National Association of Automobile Manufacturers AIFP Automotive Industry Financing Program ASEAN Association of Southeast Asian Nations ABEIVA Brazilian Association of Importers of Automotive Vehicles AALA American Automobile Labeling Act ABNT Brazilian Association for Technical Norms BNDES Brazilian National Development Bank CAP Common Agricultural Policy CAFE Corporate Average Fuel Economy CUFTA Canada-US Free Trade Agreement CAAA Clean Air Act Amendments CONAMA National Council for the Environment CTD Committee on Trade and Development CMC Council of the Common Market CET Common External Tariff DSU Dispute Settlement Understanding DOC Department of Commerce DOD Department of Defense DOT Department of Transportation DOE Department of Energy EC European Communities EEC European Economic Community EU European Union EESA Emergency Economic Stabilization Act EPA Environmental Protection Agency FAO Food and Agriculture Organization FOGS Functioning of the GATT System FRUS Foreign Relations of the United States FTP Federal Test Procedure FDI Foreign Direct Investment GATS General Agreement on Trade in Services GVC Global Value Chains GTA Global Trade Alert GSP Generalized System of Preferences GATT General Agreement on Tariffs and Trade GSTP Global System of Trade Preferences INMETRO National Institute of Metrology, Quality and Technology ITO International Trade Organization IMF International Monetary Fund page 246
Abbreviation Description II Import Tax IPI Industrial Products Tax ICMS Tax on Commerce and Services LDC Least Developed Country MFN Most-Favored Nation MERCOSUR Common Market of the South MTN Multilateral Trade Negotiations MTO Multilateral Trade Organization MVMA Motor Vehicle Manufacturers Association MOSS Market-Oriented Sector-Specific NAMA Non-Agricultural Market Access NIEO New International Economic Order NHTSA National Highway Traffic Safety Administration NAFTA North American Free Trade Agreement NFIDC Net Food-Importing Developing Country OECD Organisation for Economic Co-operation and Development PSE Producer Subsidy Equivalent PSI Program to Support Investment PNGV Partnership for a New Generation of Vehicles PROCONVE Program for Vehicle Emission RAM Recently Acceded Member RTAA Reciprocal Trade Agreements Act SCM Subsidies and Countervailing Measures SISNAMA National System for the Environment SSM Special Safeguard Mechanism SVE Small Vulnerable Economy SII Structural Impediments Initiative TARP Troubled Asset Relief Program TNC Trade Negotiations Committee TRIPS Trade-Related Intellectual Property TRIMS Trade-Related Investment Measures UK United Kingdom UN United Nations UNCTAD United Nations Conference on Trade and Development US United States USTR United States Trade Representative USABC United States Advanced Battery Consortium USCAR United States Council for Automotive Research United States Council for Automotive Research LLC VAT Value Added Tax WIPO World Intellectual Property Organization page 247
Abbreviation Description WTO World Trade Organization
page 248
LIST OF FIGURES
Figure 1: Regulations that Shape Policy Space in the International Trading System ...... 6
Figure 2: The Logic of Experts ...... 56
Figure 3 From GATT to “WTO Speak” ...... 57
Figure 4: The Logic of Common Sense ...... 59
Figure 5: Timeline of Post-Crisis Policies for the Brazilian Auto-Industry ...... 163
page 249
LIST OF TABLES
Table 1: Requirements for Domestic Manufacturers ...... 167
Table 2: Manufacturing Steps for Domestic Producers ...... 167
Table 3: Manufacturing Steps per Year ...... 169
Table 4: Requirements for Importers ...... 169
Table 5: Requirements for Investors ...... 169
Table 6: Positions of Brazil-Argentina Stakeholders regarding the INOVAR-AUTO Regime ...... 179
Table 8 : Loans and Stimulus Packages per State ...... 208
page 250
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