Trade treaties – be they free-trade agreements, bilateral investment treaties and customs unions – are back in fashion. This is good news for law firms’ global trade practices, which work on anything from influencing trade negotiations and drafting trade laws, to advising on anti-dumping remedies, export controls and international sanctions, to investor-state arbitrations.
Brexit means the UK will need a new trade agreement with the EU and similar deals with non-EU countries around the globe. The UK has not negotiated its own trade treaties since 1973, which is when it joined the then European Economic Community; so it will need a lot of legal help.
Trade agreements are also high on the agenda of Donald Trump, who ran on a protectionist ticket. He has withdrawn the US from the huge Trans-Pacific Partnership (TPP) and even suggested it could pull out of the World Trade Organization (WTO). The US is renegotiating the 23-year-old North American Free Trade Agreement with Mexico and Canada, and the Korus deal with South Korea, amid reports that all 14 US free trade agreements will be re-examined under his America First agenda.
‘There is greater public attention on [trade treaties] as a result of Trump and Brexit, which is interesting and gratifying for people who work in the field,’ says Geneva-based White & Case partner Brendan McGivern, who heads the firm’s WTO practice.
The firm has been advising sovereign and private sector clients on trade restrictions around the world ‘for decades’, he notes. White & Case has increased lawyer headcount in its international trade practice in Geneva and made ‘significant investments’ in other key trade centres, such as Brussels, Mexico City, Washington DC and Beijing. ‘Our staffing needs have been driven by the expansion of trade globally,’ says McGivern. He points to the WTO Agreement of 1 January 1995 (establishing the intergovernmental organisation) as ‘the core basis on which most trade takes place’ and the ‘expansion of free-trade agreements’.
More than 400 regional trade agreements, which include FTAs and customs unions, have been notified to the WTO since 1995. Many more are in negotiation, including the US-EU Transatlantic Trade and Investment Partnership (TTIP). The EU recently concluded the Comprehensive Economic and Trade Agreement (CETA) with Canada (provisionally in force since 21 September).
‘The EU has portrayed CETA as a template for next-generation, 21st-century trade agreements involving the EU,’ says McGivern. During her official visit to Canada in September, Theresa May said she hoped CETA would be a model for any bilateral trade deal when the UK is excluded from CETA after Brexit.
With a ‘hard Brexit’, the UK would leave both the EU and the European Economic Area, and so be outside the single market and customs union. If no new or interim trade agreements are in place between the EU and the UK by March 2019, the UK will trade with the EU and most of the rest of the world under WTO rules. As a non-EU member, the UK will also have to unbundle its WTO membership terms from those of the EU. It will, in addition, need to put into place its own trade defence system to deal with unfair trade practices, points out Edward Borovikov, managing partner in Dentons’ Brussels office. ‘The hard Brexit scenario will require the most effort from the UK government, and a lot of assistance from trade lawyers in trade practices like ours,’ he adds. Dentons is already advising clients – including from the UK, EU, Russia, Canada and the US – on the ‘options’ arising from the international trade law implications of Brexit.
While the European Commission has plenty of in-house trade lawyers, this is not the case with the UK, which has not negotiated a trade deal in over 40 years. There is therefore greater opportunity for private practice to obtain work related to this issue.
That includes supporting the lobbying and influencing efforts of companies. ‘Businesses almost always ask trade lawyers to formulate their position,’ says Borovikov.
As a result of Brexit, not only EU27 goods, but also non-EU goods originating from countries with which the EU has preferential trade agreements will be subject to a different, non-preferential customs treatment
– Lourdes Catrain, Hogan Lovells
McGivern notes: ‘Companies realise that the international trade framework the UK is operating in is going to change – in terms of negotiating new FTAs, but also in terms of how WTO rules are going to apply to the UK as an independent member.’ As with Dentons and others, White & Case’s global trade practice is also assisting clients in the NAFTA renegotiations. McGivern observes: ‘US industries are well accustomed to working with the US government when they negotiate trade agreements. It is a little more novel in the UK because the commission has been doing it for so long, but it will be a natural reflex for UK industries to want to get their priorities put forward to UK government.’
EU-UK talks on a future trading relationship have yet to begin owing to what EU’s chief negotiator Michel Barnier called a ‘disturbing deadlock’ over the UK’s divorce bill. As the Gazette went to press, there were reports that the government was willing to pay £40bn to move the process forward.
‘We are not [at the lobbying stage] yet but as we head towards March 2019, then I think there will be a greater emphasis on it, [with companies] putting forward their priorities in a very forceful way. They would usually do that through counsel,’ McGivern says.
Lode Van Den Hende, partner in charge of Herbert Smith Freehills’ EU and international trade law practice, says: ‘Brexit was one of the reasons why we increased our headcount in international trade, but it seems most of the work has come from somewhere else, strangely.’
Among the new recruits who started at the firm in January, senior EC lawyer Eric White is focusing on WTO law and the EU’s rules governing trade with non-EU countries, including the future relationship between the UK and the EU. ‘Brexit generates work, but not a huge amount. There is a lot interest from UK government quarters, we have done a lot of training for quite a few [government officials] but we haven’t had really significant instructions from the UK government,’ Van Den Hende says.
Yet, at some point there will be a significant amount of legal advice needed for Brexit (other firms the Gazette spoke to were either not advising the government or would not comment).
Clifford Chance’s 60-strong international trade team has ‘direct experience’ of EU trade negotiations as it is advising a ‘third state’ on its trade agreement with the EU. ‘The scale of the challenge for the UK to reach an effective new trade deal with the EU and to create its own network of trade deals post-Brexit should not be underestimated,’ says partner Jessica Gladstone.
‘For businesses that benefit from the EU’s FTAs to trade with or out of the UK, the changes to the UK’s trade treaties post-Brexit could have a heavy impact – including on supply chains, customer bases, company structure and business plans,’ Gladstone explains. ‘Even if the parties agree that the treaties may remain broadly the same, any change in the rules of origin or quotas could have a huge impact in practice.’
Baker McKenzie has also taken on lawyers to deal with trade-related issues. In addition to Trump and Brexit generating work, Ross Denton, a partner in Baker McKenzie’s trade department in London, says: ‘We have seen a lot of additional activity around NAFTA in the Americas, and a replacement for TPP in Asia Pacific. We have also seen a spike in oil- and gas-related work on Russia and Iran because of the JCPOA [the Iran deal, which Trump is threatening to derail]. There is also some focus on the US trade relationship with China and Russia.
‘As to [Brexit], we have seen activity across the board, both in the UK and EU-27.’
400-plus regional trade agreements notified to the WTO since 1995
3,000-plus trade agreements with ISDS provisions
48 cases registered by ICSID in 2016
278 investor-state cases pending
27% and 37% – awards in favour of investors and states, respectively
Rise and rise of WTO
Businesses are hoping for the best but preparing for the worst. They are making contingency plans for the hardest possible Brexit – that is, no new or interim trade agreement with the EU by March 2019. This explains why almost all firms have seen a spike in WTO law advice.
Brexit-related trade work is ‘really beginning to pick up’ following publication in the summer of the EU and UK position papers, says DLA Piper’s head of international trade John Forrest, who highlights ‘a significant increase in the focus on WTO law, and compatibility with WTO obligations’.
‘Many people are looking at a situation whereby there is no deal and UK-EU trade reverts to what is referred to as WTO terms,’ Forrest says. ‘It is one of the knowns in a very, very uncertain world.’ For example, clients can ‘model’ or risk assess the impact that tariff changes will have on their businesses based on the WTO rates that are currently charged on goods imported into the EU. The WTO has two sets of tariffs for goods: bound, or maximum rates, and applied rates, which is what members currently charge and can be lower than the bound rates.
DLA Piper’s 60-strong trade team is ‘actively marketing’ and ‘picking up mandates’ for a WTO risk-assessment service. ‘Clients are beginning to get into the nitty-gritty of bound and applied tariff rates,’ Forrest says, adding: ‘From a service perspective, they are beginning to look at what commitments individual [WTO] member states have taken with respect to liberalisation of their service sectors.’
Hogan Lovells has a 55-strong international trade team which includes former EU and US trade negotiators of both free trade and WTO agreements. The firm is helping ‘various industrial conglomerates’ on the impact of a hard Brexit on their supply chains both within the EU and with countries that currently benefit from preferential trading arrangements with the UK through EU free trade agreements.
‘As a result of Brexit, not only EU27 goods, but also non-EU goods originating from countries with which the EU has preferential trade agreements will be subject to a different, non-preferential customs treatment,’ says Brussels-based partner Lourdes Catrain.
Trade disputes before the WTO are already ‘a very important component’ of firms’ global trade practices. ‘On the enforcement side, we have been active bringing claims on behalf of companies through the WTO dispute settlement system,’ says McGivern of White & Case, who represents WTO member states in dispute settlement proceedings before the WTO panels and the Appellate Body.
The WTO has a binding dispute mechanism to ensure members’ compliance with their obligations under the WTO Agreement; only WTO members (governments) can bring disputes, but companies can ‘exert influence or even pressure on the government of a WTO member with respect to the triggering of a dispute’. Several WTO members, including the US and the EU, have introduced domestic legislation to allow private parties to petition their governments to bring a dispute. Trade remedies cases such as anti-dumping and countervailing duties account for about half of all cases brought to the WTO, McGivern estimates.
‘The WTO has arguably the most effective form of international dispute resolution in the history of the international treaty system. Other types of international treaty bodies have looked at the WTO as a system that works well and delivers results,’ McGivern says.
Unlike the UN International Court of Justice, which has jurisdiction only if the parties have consented to the court settling their dispute, the WTO has compulsory jurisdiction over all 164 member countries, he notes. ‘You can bring a claim, you don’t need to negotiate in advance whether the other side agrees to go [to court], the results are binding and they are enforceable through trade sanctions.’
It will be a natural reflex for UK industries to want to get their priorities put forward to UK government, so that they can make sure that any trade agreement they negotiate really corresponds to the commercial realities of UK businesses
– Brendan McGivern, White & Case
Treaty-based investor-state arbitrations are a major feature of firms’ international trade practices.
Also known as ISDS (investor-state dispute settlement), this international arbitration procedure took off in the late 1990s, driven by NAFTA, says Allen & Overy partner Matthew Hodgson: ‘From around 2000 or so, the rest of the world began to catch up with north America, most notably with claims against former Soviet bloc states, and under the Energy Charter Treaty,’ he says. ISDS provisions have been incorporated into more than 3,000 international investment agreements.
With fewer than five cases a year until 1996, by 2016 there were 48 (and a high of 52 in 2015), according to data from the International Centre for Settlement of Investment Disputes (ICSID), the main arbitral institution currently administering investor-state arbitrations. Investment treaty claims can be also brought under other arbitration rules such as UNCITRAL, ICC, and the Stockholm Chamber of Commerce, and thus the ICSID figures are not the whole story.
Furthermore, as Bart Legum, a partner in Dentons’ Paris office and head of the firm’s investment treaty arbitration practice, says: ‘The cases are big, and they tend to last for a number of years, and so the result is that at any given point in time there are hundreds that are pending.’ There are currently 278 such cases in the pipeline, according to the United Nations Conference on Trade and Development.
So what is behind the expansion in investor-state arbitrations? ‘It is a reflection of the increased number of treaties, and also of the fact that difficult economic times can make governments take extraordinary measures that can be challenged under investment treaties, where there is no relief under national law,’ Legum says. Another factor is that the vast number of these cases involve investments in developing nations. ‘In a number of developing countries courts are not so independent from the executive branch, and therefore having another forum in which justice can be achieved is a valuable contribution,’ Legum says.
ISDS has come in for much criticism, including for favouring investors over states. ‘The way the system is set up is that claims are always by investors against states. The purpose of investment treaties is to provide protection to foreign investors because of the risks they are exposed to,’ Hodgson says. ‘So in that sense the investment treaty system is in favour of the investor because it is designed to protect them.
‘The statistics also undermine the suggestion of pro-investor bias,’ he says. Only around 27% of claims have resulted in a favourable award for the investor, fewer than awards in favour of the state (around 37%), according to UNCTAD.
Hodgson adds: ‘It’s sometimes said that those settled cases are in reality investor wins but that’s not accurate – I have personally acted for states in two ICSID cases where the settlement involved no payment by the state.’
‘In my experience arbitration tribunals defer to states quite a bit,’ Legum says. ‘They are very conscious of states’ prerogatives in enacting legislation for the public good, and so they are very reluctant to find that a state has violated a treaty through its actions.’
In March this year, Dentons secured a landmark victory for the People’s Republic of China in the first investment treaty award involving the country. An ICSID arbitration tribunal dismissed all claims against China in the case of Ansung Housing Co Ltd v People’s Republic of China regarding a property development project, and awarded China legal costs and post-award interest. The dismissal was based on the requirements in the treaty (China-Korea BIT) that any claim be brought within three years of the claimant’s first knowledge of loss.
Allen & Overy successfully defended the Islamic Republic of Pakistan in two related investment treaty claims (under UNCITRAL-rules) valued by the claimants at $575m and brought under the UK-
Pakistan and Mauritius-Pakistan investment treaties. The claims arose from alleged interference in gas import operations at a terminal at the country’s second-biggest port; the tribunal dismissed the claims against Pakistan in their entirety and ordered the claimants to pay 90% of Pakistan’s costs.
Criticism of ISDS has intensified in recent years, particularly since the multilateral negotiations for TTIP, CETA and TPP, and cases such as Philip Morris v Australia, in which the tobacco giant challenged Australia’s plain packaging regulation under a 1993 Hong Kong-Australia BIT.
Last year, protesters took to the streets in Brussels against CETA and TTIP and their ISDS provisions. Commission president Jean-Claude Juncker has called the arbitral tribunals hearing investor-state disputes ‘secret courts’.
‘It is true that arbitration is generally confidential, such that pleadings and evidence (and hearings) will not be open to the public, but I don’t think it’s accurate to describe the process as “secret”. A great deal of information is in the public domain, including many awards,’ Hodgson says. ‘Various other information on claims, including procedural matters, is found on the ICSID website.’
Following a public consultation by the commission in 2014, and ‘intense debate’ in the European Parliament, EU governments, and civil society at large, a bilateral ‘investment court system’ has now replaced ISDS provisions in CETA and the recent EU-Vietnam FTA. Both agreements also provide for a ‘permanent multilateral investment court’ – yet to be established – that will adjudicate disputes under future and existing investment treaties signed by the EU.
‘The EU is trying to find ways of making this politically acceptable because the risk at the moment is that they wouldn’t get all the member states to sign up to new trade agreements that have investor-state arbitration in them,’ Van Den Hende says.
‘Essentially, the idea is to build another European-like institution, which would be a new court to decide investment claims,’ says Legum. ‘I am not sure how much appetite there will be for it outside the EU.’
So to what extent is the UK government bulking up its legal capacity to prepare for Brexit and trade treaties afterwards? Will the UK be match-fit for the new trade world it is entering?
The Gazette asked the Department for International Trade how many trade lawyers it was hiring and training in-house, and whether it was also outsourcing advice to the private sector. The department responded: ‘The Department’s Trade Policy Group has grown significantly since July 2016, from 45 to just under 400 today, and is continuing to grow. This includes policy and country specialists, as well as expert economic analysts and lawyers.
‘DIT’s legal advisers are part of the Government Legal Department (GLD). GLD operates a scheme to train lawyers at a government-wide level, and has approximately 50 first- and second-year trainees at any given time. As with all departments, we engage external lawyers as and when needed via the government’s procurement frameworks to support and supplement the work of the in-house team.’
Whether that is enough will soon be tested.
Marialuisa Taddia is a freelance journalist