EU’s Long Arm of Sanctions – Enforcement of Sustainability Provisions in Trade Agreements

Mihai Ioachimescu-Voinea
Mihai Ioachimescu-Voinea

Introduction

Economic sanctions have been recently used by the EU as an effective enforcement tool to ensure third countries’ compliance with international norms. This comes following a global climate where even consolidated democracies, such as the United States (US), challenged international norms. Sanctions were used by the EU following egregious infringements of jus cogens norms (EU restrictive measures against Russia), in order to determine compliance with uncooperative parties during WTO dispute resolution procedures (W. Weiß and C. Furculita) and will be used as a tool to fend off economic coercion applied by third countries (Proposal for an EU Anti-Coercion Mechanism).

Context

For decades the European Union (EU) has pursued an external policy that had at its core the promotion of free trade. The idea was for the EU to promote to the extent possible the receipe of success that ensured the Union’s prosperity and development. Multilateral liberalisation and regional integration would ideally lead to economic development and would reduce poverty worldwide. As a result, environmental and social aspects laid out in Trade and Sustainable Development (TSD) chapters of EU Free Trade Agreements (FTAs) were secondary to the aim of reducing barriers to trade. Since 2009, Art. 3(5) of the Lisbon Treaty championed sustainable development, eradication of poverty and protection of human rights, as a part of the EU aims for external relations, along with the promotion of free trade.

According to the European Environment Agency Report in 2020, the costs of economic losses caused by climate change exceeded € 487 billion in the last 40 years. With the expected increase in temperatures, the amount losses caused by climate change will only grow in the years to come. While the EU proposed a series of policy changes in order to become climate neutral via the European Green Deal initiatives, climate change represents a global challenge that needs to be addressed at a multilateral level. However strict environmental and labour rules adopted at European level only could lead to a ‘carbon leakage’ and negatively affect the competitiveness of the EU market (for more, please see the Proposal for a carbon border adjustment mechanism), which would have to comply with higher production costs. Likewise, weak labour standards in third countries would result in unfair competition generated by lower labour costs.

To deal with some of these issues, trade has been used as a tool to promote sustainable and social developments and safeguard the EU’s internal market. Since 2015 the Commission recognised the importance of sustainability for trade (Towards a more responsible trade and investment policy, TSD chapters in EU FTAs). In practice, while making considerable progress, the Commission punched below its weight when it came to environmental and social standards, such as it was with the EU-MERCOSUR and EU-China trade agreements. This lead to non-binding clauses, vague  commitments and weak enforcement rules when it came to TSD provisions, as was reflected in the European Parliamentary Research Service (EPRS) Briefing – Labour rights in EU trade agreements.

Environmental enforcement

TSD chapters in FTAs cover both sustainability and labour standards. Post-2015 FTAs contain a commitment to effectively implement the Paris Agreement (e.g. EU-UK Trade and Cooperation Agreement, EU-Mercosur, EU-Vietnam FTA, EU-Japan FTA). While Paris Agreement itself does not contain result obligations, it has been considered that the commitments made to effectively implement the Paris Agreement amounts at least to a ‘best effort obligation’ (M. Bronckers & G. Gruni). Even so, in the absence of a schedule with timelines and milestones, the language used in the TSD chapters leave considerable room for third countries to escape enforcement requests. Even if a panel would find that a ‘best effort obligation’ has been breached, under the current TSD regimes, the defaulting country would not be required to comply with such a finding, making the provision de facto unenforceable.

Labour enforcement

A majority of EU FTAs partners are already part of the ILO Conventions, which set up international labour standards and rights. However, not all of EU’s partners ratified fully the ILO fundamental Conventions (e.g. Brazil, China, Japan, South Korea, Singapore, Vietnam). In such cases, the FTA’s TSD provisions requires the third states to make ‘continued and sustained efforts towards ratifying the ILO Conventions.’ EU-Korea FTA made no exception (Art. 13.4 EU-Korea FTA). In a much-anticipated report from the dispute resolution panel concerning the obligation of Korea to ratify the ILO Conventions, the panel recognised the weak nature of the ‘best efforts obligation’ enshrined in the EU-Korea FTA. The report found that the TSD provisions in the EU-Korea FTA did not set ‘explicit targets’ or ‘milestones’ when it came to Korea’s obligation of ratification. As a result, South Korea was not in breach of the EU-Korea FTA.

TSD dispute resolution mechanism

Currently, TSD chapters of EU FTAs exclude labour standards and environmental obligations from the set of rights which can be enforced via regular dispute settlement proceedings (except for the EU-CARIFORUM Economic Partnership Agreement). As such, a separate procedural framework exists for TSD-related disputes. The main differences between the regular trade-dispute settlement mechanism and the TSD dispute settlement mechanism are:

– A finding of infringement of an obligation under the TSD chapter is not binding, as panels will issue a report containing a series of recommendations;

– If the country does not follow the recommendations made, no sanctions or remedies are foreseen.

Commission’s approach

Calls have been made both by EU institutions (European Parliament resolution on human rights and social and environmental standards in international trade agreements) and academics (M. Bronckers & G. Gruni) for the EU to address the above issues, by setting up stricter enforceable standards, strenghtening the dispute settlement mechanism and by introducing sanctions.

The Commission appears to have listen to those calls. In 2018, the Commission published a non-paper 15-Point Action Plan in order to enhance the implementation and enforcement of TSD chapters.

Following further consultations, the Commission adopted on June 22, 2022 the Communication – The power of trade partnership: together for green and just economic growth (the 2022 Communication). In the 2022 Communication, the Commission further developped the 15-Point Action Plan and proposed a couple of groundbreaking measures, such as the extension of the trade dispute settlement procedure to the TSD chapter and the possiblity to apply trade sanctions for TSD violations.

The 2022 Communication identifies six policy priorities, where Action Points have been proposed by the Commission. Those are (1) the need to be more proactive in the cooperation with partners; (2) stepping up the country-specific approach; (3) mainstreaming sustainability beyond the TSD chapter of trade agreements; (4) increasing the monitoring of the implementation of TSD commitments; (5) reinforcing the role of civil society; and (6) enhancing enforcement by means of trade sanctions as a measure of last resort.

Enforcement of TSD chapter

According to the 2022 Communication, the Commission seeks to bring the TSD disputes under the FTA’s general state-to-state dispute settlement mechanism. Such a move will have two major effects. Firstly, it will make the report issued by a panel binding, even in cases of sustainability violations. Secondly, it will allow the EU to retaliate via trade sanctions whenever a party will fail to comply with a panel’s report.

The use of the general dispute settlement mechanism will also allow the EU to monitor the implementation of the report during the compliance stage. According to the dispute resolution provisions enshrined in the EU FTAs, the defaulting party will have to inform how it will implement the panel report in a certain time frame.

The 2022 Communication refers to the possibility to impose trade sanction, as a matter of last resort:

– In case of infringement of labour standards, to the extent that there are ‘serious instances of non-compliances’ with the ILO fundamental principles and rights at work;

– In case of violations of environmental commitments, where the failure to comply with obligations would ‘materially defeat the object and purpose’ of the Paris Agreement.

The thresholds that would be used in the examination of the two legal tests for the application of sanctions would therefore be different. In case of environmental infringements, the requirements of the test seems to be stricter. According to Art. 60(3) of the Vienna Convention on the Law of Treaties (VCLT), ‘a material breach of a treaty’ consists in a outright repudiation of the treaty or in ‘the violation of a provision essential to the accomplishment of the object or purpose of the treaty’. As such, retaliation for infringement of environmental commitments would require at least a ‘substantial’ violation of an essential provision of the Paris Agreement, in order to constitute a ‘material breach’ (Thanapat Chatinakrob). Conversely, an ‘ordinary’ or ‘superficial’ breach of an essential provision would not lead to the possibility of applying trade sanctions. With regards to the labour standards, a ‘serious violation’ of any of the five principles enshrined in the ILO Declaration on Fundamental Principles and Rights at Work would appear to suffice in order to trigger the possibility of trade remedies.

Conclusion

The new enforcement model of TSD chapters proposed by the Commission in its 2022 Communication will have to be negotiated with future partners and included in the ongoing negotiations of FTAs. Other actions, such as the enhancement of the role of civil society in monitoring and implementation of TSD commitments will be deployed quicker, once the European Parliament and the Council endorse the Commission’s 2022 Communication paper.

The possibility of the EU to adopt trade sanctions following violations of the TSD chapters will probably lead to an amendment of the Enforcement Regulation. The introduction of TSD disputes under general dispute settlement mechanism would help avoid some of the legality questions related to retaliation (for more, please see M. Bronckers & G. Gruni). The sanctions regime will be included in future FTAs and will not rely on principles of general international law. The changes envisaged by the Commission will increase the degree of compliance with labour and environmental requirements and will enhance the protection of the EU’s internal market.

Mihai Ioachimescu-Voinea, Senior Associate SĂVESCU & ASSOCIATES

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