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International Economic Law pp 129–147Cite as

The Mutually Agreed Solution Between Indonesia and the United States in US – Clove Cigarettes: A Case of Efficient Breach (or Power Politics)?

Abstract

The Mutually Agreed Solution (MAS) to the US – Clove Cigarettes case between the United States and Indonesia evokes the idea of the WTO dispute settlement system allowing for efficient breach. Through the MAS, the case was declared settled based on mutual commitments of the two parties, while the original violation by the US remains in place. The paper first discusses whether MAS are a means through which WTO law allows such flexibility, concluding that such a view is tenable despite valid objections. Then, it inquires whether the MAS found between Indonesia and the US can be considered an efficient breach. In this context, the paper analyses the mutual commitments of the US and Indonesia with specific attention to the potential role of power in the settlement. The paper argues that from a legal perspective the MAS between Indonesia and the US cannot be considered a case of efficient breach, although politically the situation established through the MAS resembles a situation of efficient breach. The paper finds that power imbalances played a role in the settlement and suggests that the case study of this specific MAS highlights systemic risks in the current handling of WTO dispute settlement through MAS.

Keywords

  • Developing countries
  • Efficient breach
  • Mutually agreed solution
  • WTO dispute settlement

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Notes

  1. 1.

    WTO doc. WT/DS407/17, Notification of a Mutually Agreed Solution, United States—Measures Affecting the Production and Sale of Clove Cigarettes (US – Clove Cigarettes), 9 October 2014.

  2. 2.

    Through the MoU the two States have fixed a set of mutual commitments which they consider as the basis to declare the dispute settled. In terms of the WTO dispute settlement system an agreement between disputing parties to settle the case is a MAS. After notification of a MAS to the DSB the dispute is considered to be settled under the WTO dispute settlement system.

  3. 3.

    Memorandum of Understanding between the Government of the United States of America and the Government of the Republic of Indonesia, 3rd Oct 2014, https://ustr.gov/sites/default/files/US%20Indo%20MOU.pdf (accessed 21 January 2016).

  4. 4.

    Whether WTO law allows States to “buy out of” their obligations or whether it requires States to, eventually, comply with their obligations has been a matter of long-standing academic debate, cf. Hippler Bello (1996); Jackson (1997); Schwartz and Sykes (2002); Trachtman (2007); Pauwelyn (2010), pp. 34–65.

  5. 5.

    Schwartz and Sykes (2002), p. 181.

  6. 6.

    Pauwelyn introduces in so far the distinction between “intra-contractual behaviour”, which he does not consider to constitute efficient “breach”, and “extra-contractual behaviour”, which he considers to be the actual content of the theory of efficient breach, Pauwelyn (2008), p. 14. In his view the theory of efficient breach thus “questions the legally binding nature of the law”, ibid.

  7. 7.

    Calabresi and Melamed introduced these concepts in reference to domestic law settings, distinguishing entitlements as being protected by property, liability or inalienability rules, Calabresi and Melamed (1972).

  8. 8.

    Ibid., p. 1092.

  9. 9.

    Cf. Dunoff and Trachtman (1999). The approach rests on the value of individual choice considering each person to be “in charge of his or her own utility function” (ibid., p. 11).

  10. 10.

    Cf. Schwartz and Sykes (2002), p. 182.

  11. 11.

    A narrower understanding of efficient “breach” would consider only those situations as efficient breach in which a deviation occurred without consent. Cf. Pauwelyn (2008), p. 14.

  12. 12.

    Calabresi and Melamed (1972), p. 1092.

  13. 13.

    Cf. Pauwelyn (2008), p. 13; Schwartz and Sykes (2002), p. 182.

  14. 14.

    Schwartz and Sykes (2002), p. 182. Again, a narrow understanding of efficient breach would consider only those situations as efficient breach in which a deviation occurred without full compensation, cf. Pauwelyn (2008), p. 14.

  15. 15.

    Calabresi and Melamed (1972), pp. 1092 ff.

  16. 16.

    Cf. Pauwelyn (2008), p. 134; Schwartz and Sykes (2002), pp. 186–188; Zimmermann (2011), p. 397.

  17. 17.

    Cf. Schwartz and Sykes (2002), pp. 191 f. and 20 ff.

  18. 18.

    Trachtman (2007), pp. 146 and 149.

  19. 19.

    Cf. Mavroidis (2000), p. 800.

  20. 20.

    Jackson (1997); Pauwelyn (2000); Hudec (2000); Charnovitz (2001); van den Broek (2003); Nzelibe (2005); Bronckers and van den Broek (2005); Choi (2007); Eeckhout (2009); Pauwelyn (2010); Shaffer and Ganin (2010); Zimmermann (2011); Bronckers and Baetens (2013); Vidigal (2013); Tijmes (2014). Cf. also arbitrators in these proceedings under art 22.6 DSU, WTO doc. WT/DS27/ARB, European Communities (EC) – Regime for the Importation, Sale and Distribution of Bananas III (EC – Bananas III), 9 April 1999, para 6.3; WTO doc. WT/DS27/ARB/ECU EC – Bananas III, 24 March 2000, para 166; WTO doc. WT/DS26/ARB, EC – Measures Concerning Meat and Meat Products (Hormones) (EC – Hormones), 12 July 1999, para 40; WTO doc. WT/DS46/ARB Brazil – Export Financing Programme for Aircraft, 28 August 2000, para 3.43 ff.; WTO doc. WT/DS108/ARB, US – Tax Treatment for Foreign Sales Corporations, 30 August 2002, para 5.52; WTO doc. WT/DS136/ARB, US – Anti-Dumping Act of 1916, 24 February 2004, para 5.5.

  21. 21.

    Art 22 DSU envisages either mutually agreed compensation or unilateral suspension of concessions or other obligations by the complainant towards the non-compliant respondent as potential remedies. Both measures are explicitly considered temporary, cf. art 22.1 sent. 1 and art 22.8 sent. 1 DSU.

  22. 22.

    Jackson (1997), p. 116; Zimmermann (2011), p. 394.

  23. 23.

    WTO doc. WT/DS320/AB/R, Appellate Body Report, US – Continued Suspension, 16 October 2008, paras 304–310. “The requirement that the suspension of concessions must be temporary indicates that the suspension of concessions, as the last resort available under the DSU when compliance is not achieved, is an abnormal state of affairs that is not meant to remain indefinitely. Members must act in a cooperative manner so that the normal state of affairs, that is, compliance with the covered agreements and absence of the suspension of concessions, may be restored as quickly as possible” (ibid., para 310).

  24. 24.

    Zimmermann (2011), p. 398.

  25. 25.

    Ibid., p. 402.

  26. 26.

    Pauwelyn (2008), p. 115.

  27. 27.

    Art 3.7 sent. 3 DSU explicitly states: “A solution mutually acceptable to the parties to a dispute and consistent with the covered agreements is clearly to be preferred”. Article 22.8 sent. 1 DSU states: “The suspension of concessions and other agreements shall be temporary and shall be only applied until such time as … a mutually satisfactory solution is reached”.

  28. 28.

    These requirements reflect customary rules of general international law on inter se agreements in multilateral treaty settings as codified in art 41 Vienna Convention on the Law of Treaties (VCLT). If a multilateral treaty does not provide explicitly for the possibility to modify rights and obligations among a sub-set of parties (art 4.1(a) VLCT), inter se agreements need to conform to two central substantive requirements: the modification shall “not affect the enjoyment by the other parties of their rights” and shall “not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole” (art 41.1(b) VCLT).

  29. 29.

    WTO doc. WT/DS27/AB/RW2/ECU, Appellate Body Report, EC – Bananas III, 2nd Recourse by Ecuador to art 21.5 DSU, 26 November 2008, paras 212–222.

  30. 30.

    Ibid., para 217.

  31. 31.

    Cf. WTO doc. WT/DS320/AB/R, supra, n. 23, para 304 (emphasis added). Article 22.8 DSU specifies the conditions under which the suspension of concessions has to be terminated.

  32. 32.

    Ibid., paras 304 and 305.

  33. 33.

    Pauwelyn (2008), p. 109 in fn 6. In light of the 2001 Draft Articles on Responsibility of States for Internationally Wrongful Acts, the MAS would function as a consent precluding wrongfulness pursuant to art 20 and a loss of the right to invoke responsibility according to art 45(a) of the Draft Articles. Since the DSU focuses prospectively on conformity with the covered agreements, art 19.1 DSU, the only prospective nature a consent/waiver under general international law would still mean that the case would be moot under the rules of the DSU.

    As arts 30.4 and 30.5 VCLT require conformity with the conditions of art 41 VCLT for inter se agreements in multilateral treaty settings, Pauwelyn apparently asserts that the DSU provides for the possibility of inter se agreements through MAS in line with art 41.1(a) VCLT. One may reject this argument based on art 3.5 DSU that reflects the more restrictive conditions of art 41(b) VCLT.

  34. 34.

    Cf. art 3.7 sent. 1 DSU.

  35. 35.

    The AB’s statement in WTO doc. WT/DS320/AB/R supra, n. 23 that all solutions to a dispute mentioned in art 22.8 DSU must be substantive and remedy the inconsistencies found by the DSB can be seen to support this argument.

  36. 36.

    Pauwelyn (2003), p. 925 ff. Contra to this view Carmody (2006).

  37. 37.

    Cf. Pauwelyn (2003), pp. 939–940. Therefore, MAS in subsidies-related cases that allow the original inconsistency to remain in place would be more problematic.

  38. 38.

    Section 907 (a)(1)(A) Federal Food, Drug and Cosmetic Act, added by Section 101(b) of Family Smoking Prevention and Tobacco Control Act, Public Law No. 111-31, 123 Stat. 1776 (22 June 2009).

  39. 39.

    Cf. WTO doc. WT/DS406/R, Panel Report, US – Clove Cigarettes, 2 September 2011; WTO doc. WT/DS406/AB/R, Appellate Body Report, US – Clove Cigarettes, 4 April 2012.

  40. 40.

    The obligation at issue in US – Clove Cigarettes is of a bilateral, instead of a collective nature since it can be differentiated and individualized as can be seen from the facts of the case.

  41. 41.

    Cf. WTO doc. WT/DS406/AB/R, supra, n. 39, para 225.

  42. 42.

    Cf. WTO doc. WT/DS406/12, US – Clove Cigarettes, Recourse to art 22.2 DSU by Indonesia, 13 August 2013.

  43. 43.

    Instead of many other commentators see Abbott (2010).

  44. 44.

    Cf. WTO doc. WT/DS406/12, supra, n. 42.

  45. 45.

    Cf. WTO doc. WT/DS455/1, Request for consultations by the US, Indonesia – Importation of Horticultural Products, Animals and Animal Products (Indonesia–Horticultural Products), 14 January 2013.

  46. 46.

    Cf. commentators cited supra, n. 21, in particular in favor of the public choice-based logic delineated here Nzelibe (2005).

  47. 47.

    The following cases can be cited as examples of a tactic to prolong proceedings WTO doc. WT/DS27, EC–Bananas III; WTO doc. WT/DS285, US–Measures Affecting the Cross-Border Supply of Gambling and Betting Services.

  48. 48.

    Cf. WTO Doc. WT/DS406/13, US – Clove Cigarettes, Recourse to art 22.6 DSU by the US, 23 August 2013.

  49. 49.

    Cf. WTO Doc. WT/DS406/16, US – Clove Cigarettes, Recourse to art 22.6 DSU by Indonesia—Communication from the Arbitrator, 27 June 2014.

  50. 50.

    Cf. WTO Doc. WT/DS406/17, US – Clove Cigarettes, Notification of a Mutually Agreed Solution, 9 October 2014.

  51. 51.

    Cf. WTO Doc. WT/DS406/18, US – Clove Cigarettes, Recourse to art 22.6 DSU by the US—Communication by the Arbitrator, 9 October 2014.

  52. 52.

    Cf. MoU, supra, n. 3.

  53. 53.

    Trachtman (2008), p. 141; Pauwelyn refers in this regard to the importance of the “kicker” of community costs to back up protection of entitlements by a property rule, Pauwelyn (2008), p. 175. Cf. for the general importance of reputation costs in international law Guzman (2008).

  54. 54.

    Minutes of the Meetings of the DSB from October 2014 to November 2015 were checked.

  55. 55.

    As specified in Section B of the MoU. Section B explicitly mentions the notification of a MAS of the whole dispute to the DSB.

  56. 56.

    As specified in Section A of the MoU.

  57. 57.

    At least by its wording the MoU does not constitute an “interim solution” which merely anticipates a final solution of the dispute once the agreed commitments have been fulfilled. For the recent trend on such “interim solutions” in MAS, see Alschner (2014), pp. 84 ff.

  58. 58.

    WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, paras 212–222. Moreover, the AB has emphasized the requirement of substantive resolutions to a dispute, cf. WTO doc. WT/DS320/AB/R, supra, n 23, paras 304–310.

  59. 59.

    WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, para 217.

  60. 60.

    Ibid., para 221, the AB considered a wording of the MoU between Ecuador and the EU that was similar to the wording in Section B of the MoU between the US and Indonesia as neutral and not giving a clear indication of a relinquishment of the right to compliance proceedings under art 21.5 DSU.

  61. 61.

    MoU, supra, n. 3, Section A—Generalized System of Preferences Product Eligibility, para 1.

  62. 62.

    The MoU again uses the rather soft language of giving “favorable consideration, at the appropriate time and consistent with U.S. laws and regulations, to a request from Indonesia for a competitive need limitation waiver”; cf. ibid., Section A—Generalized System of Preferences Product Eligibility, para 2.

  63. 63.

    Office of the USTR, GSP Expiration: Frequently Asked Questions https://ustr.gov/sites/default/files/FAQs-on-GSP-Expiration-Nov2014_4.pdf (accessed 14 January 2016).

  64. 64.

    Such commitments of “best endeavor” raise concerns as they are hardly enforceable, even if one were to accept the argument in favour of enforceability of MAS within the WTO DSS (see Alvarez-Jimenez (2011)); rejecting this argument Alschner (2014), p. 89. However, the point about enforcement has become moot in this case since the US has fulfilled its commitment by re-authorizing the GSP scheme (see Sec. 201 of the Trade Preferences Extension Act of 2015) and designating wiring harnesses from Indonesia as an eligible product. However, the reason for designating wiring harnesses as eligible product is apparently explained by the fact that imports from Indonesia were too minimal to apply the competitive need limitation. Thus, a waiver of this test as anticipated in the MoU was not necessary to achieve the result, cf. Office of the USTR, GSP: Results of the GSP Limited Product Review, Including Actions Related to Competitive Needs Limitations, Federal Register, Vol. 80, No. 194, 7 Oct 2015, 60731, http://www.regulations.gov/#!documentDetail;D=USTR-2015-0007-0037 (accessed 14 January 2016).

  65. 65.

    Cf. Office of the USTR, GSP-eligible Products from All Beneficiary Countries, https://ustr.gov/sites/default/files/GSP%20eligible%20all%20BDCs%20%282012%29%20Revised%20August%202012.pdf (accessed 14 January 2016).

  66. 66.

    Cf. Office of the USTR, Active GSP Country Practices Reviews, Updated November 2014, https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp/current-review-0 (accessed 15 January 2016). According to Sec. 2462 (c) (5) under the GSP-chapter of the US Trade Act of 1974 adequate and effective protection to intellectual property rights is a factor affecting country eligibility under the GSP-scheme. In fact, this threat may have been an additional reason for Indonesia not to retaliate against the US for non-compliance with the WTO ruling by suspending obligations under the TRIPs Agreement.

  67. 67.

    Cf. MoU, supra, n. 3, Section A—Intellectual Property Rights.

  68. 68.

    Indonesia has been on the IP Priority Watch List at least since 2010. The IP Priority Watch List is compiled by the Office of the USTR as part of an annual Special 301 Report pursuant to Section 182 of the Trade Act of 1974, as amended by the Omnibus Trade and Competitiveness Act of 1988 and the Uruguay Round Agreements Act (19 U.S.C. § 2242). Countries placed on the Priority Watch List are considered to have particular problems with respect to IP rights protection and enforcement and shall be the “focus of increased bilateral attention” on IP issues, including through bilateral agreements. Determinations in this report may also influence country eligibility for GSP-preferences under the US GSP scheme, cf. US Trade Act of 1974, Section 2462(c)(5).

  69. 69.

    Cf. MoU, supra, n. 3, Section A—Cigars or Cigarillos.

  70. 70.

    Cf. International Centre for Trade and Sustainable Development, Bridges (2014).

  71. 71.

    Cf. MoU, supra, n. 3, Section A—Mineral Ores Export Restraint.

  72. 72.

    The Indonesian Mining Law of 2009 already foresaw the requirement that mining companies in Indonesia process raw materials within Indonesia before exporting them. In January 2014, the provisions (art 103 and 107 Mining Law of 2009) that set forth the export ban took effect and implementing regulations were issued. Cf. for a summary of the respective measures Tivey et al. (2014).

  73. 73.

    Cf. Nusa Tenggara Partnership B.V. and PT Newmont Nusa Tenggara v. Republic of Indonesia, ICSID Case No. ARB/14/15, 15 July 2014. Cf. for an explanation why the Dutch-Indonesian BIT was used see van der Pas and Damanik (2014).

  74. 74.

    Cf. for details the following reports New York Times (2014); Indonesia-Investments (2014); van der Pas and Damanik (2014).

  75. 75.

    Cf. MoU, supra, n. 3, Section A—Mineral Ores Export Restraint.

  76. 76.

    Cf. WTO doc. WT/DS27/AB/RW2/ECU, supra, n. 29, paras 212–222.

  77. 77.

    Cf. statement by the US in WTO doc. WT/DSB/M/351, Minutes of the Meeting, 20 October 2014, para 8.1.

  78. 78.

    This is exactly what Schwartz and Sykes argue is the metric of welfare for decision-makers in the trade context. Schwartz and Sykes (2002), pp. 183 ff.

  79. 79.

    Hudec (2000), p. 34; Trachtman (2008), p. 141; Pauwelyn (2008), p. 172 ff.

  80. 80.

    Remarkably, even the lack of notification of the MoU as required by art 3.6 DSU did not raise any objections by WTO Members.

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    Johannes Norpoth

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    Anna G. Micara

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Norpoth, J. (2017). The Mutually Agreed Solution Between Indonesia and the United States in US – Clove Cigarettes: A Case of Efficient Breach (or Power Politics)?. In: Adinolfi, G., Baetens, F., Caiado, J., Lupone, A., Micara, A. (eds) International Economic Law. Springer, Cham. https://doi.org/10.1007/978-3-319-44645-5_8

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