On Independence Day, Two Ways International Law Tests Social Contracts

CAFTA’s First Labor Case: Workers, 0; Capital, 1.

First, last week, the first ever legal test of labor rights under a trade deal was released. The Obama administration had launched the case in 2011, alleging that Guatemala’s failure to ensure reinstatement for union organizers violated the terms of the U.S.-Central America Free Trade Agreement (CAFTA). Unlike the earlier North American Free Trade Agreement with Mexico and Canada finalized by Bill Clinton, George W. Bush’s CAFTA included labor obligations in the core text of the treaty. This had long been a demand of organized labor, who criticized Bush for not going far enough at the time but were instrumental in pushing for the test run.

The action carried short-term and long-term political potential. After Obama had pushed through a trade deal with Colombia – which led the world in murders of unionists – he needed to re-establish ties with labor in advance of his 2012 re-election campaign. And, if successful, the case promised to give workers a reason to go beyond fears of displacement and be for globalization.

Alas, it was not to be. A panel of three ad hoc adjudicators – Queens University labor lawyer Kevin Banks, D.C.-based investment lawyer Ted Posner, and former World Trade Organization judge Ricardo Ramirez-Hernandez – found that the U.S. had not borne its burden of proof. Specifically, while Obama’s trade attorneys showed convincingly that Guatemalan companies routinely abused union organizers without effective government penalty in violation of national and international law, they had not showed a sufficient nexus to trade advantages for the companies’ exporters.    

The panelists’ decision was met by howls on the left, but they appeared to faithfully discharge their remit. The relevant obligation in CAFTA’s Article 16.2, after all, is for countries to “not fail to effectively enforce its labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties” (emphasis added). The negotiators could have just as easily put a requirement that all labor rights be observed (trade-related or not). This could have been a way to use international law to enfranchise all workers – in tradable and service sectors alike. In the realm of international legal interpretation, countries’ sovereign decision to require a tight link to trade had to be given weight. (As it happens, not even the Obama administration’s Trans-Pacific Partnership – vaunted for its supposed improvement to labor rights – removes the hurdles identified by the panel.) 

There are political economy reasons countries might want to limit their international labor law obligations. Cheap labor costs are a source of comparative advantage for developing nations, while developed countries have complicated domestic labor law arrangements that might not synch up easily at the international level.

But the downside of not agreeing to binding constraints is that workers are given less of a stake in global integration and more likely to see it as a threat. This is doubly true in the U.S., where domestic labor law has only gotten one or two major upgrades in over two centuries.

Steel Tariffs: Nationalism the Smart Way or Baby Splitting?

Another testing of the international social contract is slated for the days ahead, when the Trump administration is scheduled to announce a decision on steel tariffs. The White House – with labor backing – had threatened to raise barriers against foreign steel under national security provisions of trade law. These rarely used tools invite foreign retaliation and have been called the “nuclear option” of commerce.

The measure is pretty widely seen to be a bad idea, but let me argue the other side of the case for a moment.  The fact is, trade law was not written to be an effective deterrent against mercantilism on the Chinese scale. More traditional policy tools like anti-dumping orders presume low-tariff trade, but allow for limited deviations on a country-by-country, industry-by-industry basis. This made sense in a world where deviations from open trading norms were small scale exceptions. But that is decidedly not the case today, when China subsidizes production, lowers global prices below their would-be free market floors, and catapults its way into the top producer slot internationally. Even when Chinese direct imports into the U.S. are low, the global steel market is depressed via low-cost sales in China, Europe, and elsewhere – which in turn can hurt U.S. producers and workers in the sector.

If one agrees that steel overcapacity is a problem, and that supply chains are real, then the right response is at the global scale. Indeed, when the Obama administration tried to use bilateral mechanisms to solve a similar trade friction with China that had multilateral dimension, D.C. pundits panned them for their predictable inefficacy.

Yet the global response has not come. Last year, Obama lodged a complaint with the WTO that will drag out and that the U.S. is unlikely to win. The loyalties of industries throughout the West are divided, as they rely on cheap steel as an intermediate input. Indeed, NATO allies have launched an unusual lobbying campaign of the U.S. Defense Department to get the administration to drop its effort.

It is in this context – not to mention decades of policymakers systematically sidelining the interests of manufacturing labor with a “displace first, ask questions later” trade policy – that Secretary Wilbur Ross raised the specter of the so-called nuclear option. The statute contemplates use of the tool when all other options fail, and allows a wide suite of concerns to be considered – including impacts of adverse trade flows on the continued investment and human know-how in the manufacturing sector. In other words, the law is expressly not limited to situations where the U.S. is under immediate military threat. 

An administration with more deal-making acumen might have used Ross’ move to get the world’s attention and raise the specter of barriers, alongside a promise to lower them immediately after countries came together to negotiate new global rules more suited to the era of China’s rise. 

This does not appear to be the road we are on. Under pressure from foreign allies and Washington trade watchers, the administration is poised to exempt wide swaths of trade from the steel orders. Canada, Mexico, and European nations have lobbied to be carved out from the order, leaving perhaps only China as the target.

This makes sense as diplomacy, but not from the vantage point of defending the action at the World Trade Organization. Under WTO rules, countries take on obligations and benefit from exceptions – essentially ways to get out of their obligations in certain circumstances. For instance, countries must liberalize trade flows, but then can restrict them if “necessary” for achieving public interest goals. In over 20 years of WTO cases, this set-up has produced some quirky results. For instance, if a country is going to restrict bank flows in order to achieve tax justice, the measure may be more defensible if it restricts those flows more aggressively and thus contributes in a more fulsome way to the non-trade policy goal. In other words, if a country is going to break the trade rules, they may need to go big or go home.

We don’t know how a WTO panel would rule on the national security exception. On the one hand, unlike the public interest exceptions, the security exception is not qualified by a “necessity” requirement. On the other, WTO adjudicators – faced with similar previously untested exceptions – have shown themselves willing to import similar types of qualifications where they had not existed previously. 

In short, once the U.S. begins using essentially political criteria to carve out its friends, it undermines the economic efficacy of the measure, and thus makes it harder to defend before WTO panels.

Still Waiting on Global Social Democracy

Neither of these decisions was going to make the global economy into a social democracy. Both stood to benefit only a relative handful of workers – a few Guatemalan stevedores and textile workers in the CAFTA case, and a larger number of U.S. steelworkers in the steel decision. Moreover, in the case of the steel decision, workers in steel-using industries stood to suffer. 

But they both illustrate how diplomatic norms gum up the works for workers. Central American countries were unlikely to agree to a trade deal that intruded more thoroughly on their labor law sovereignty than CAFTA did. The compromise was a trade nexus that makes it harder for labor violations to be found.

In steel, the U.S. diplomatic incentives are to carve out allies – a move which weakens the benefit for U.S. steelworkers and makes the overall policy harder to defend. Without a comprehensive rebalancing of class interests in international law, the domestic and international politics of trade will remain on a collision course.