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One Step Forward, Two Steps Back?: The EU-MERCOSUR Dispute Settlement Mechanism in the Light of the EU´s Experience with Free Trade Agreements (FTAs)

Luca Pantaleo and Francesco Seatzu

Il presente lavoro si prefigge l’obiettivo di esaminare i tratti distintivi del meccanismo di risoluzione delle controversie istituito dall’accordo di libero scambio tra Unione europea e MERCOSUR, al fine di valutarne l’idoneità ad assurgere a foro sufficientemente attraente ed alternativo al sistema OMC, anche alla luce della perdurante crisi di quest’ultimo. In questa prospettiva, il lavoro si occupa altresì della ricostruzione del significato precettivo e delle eventuali ripercussioni derivanti dall’inclusione nel capitolo ‘Commercio e Sviluppo Sostenibile’ del sopra menzionato accordo commerciale dell’Unione di un meccanismo parallelo di risoluzione delle controversie in materia di commercio e sviluppo. Ma non è tutto: il presente lavoro affronta anche le questioni delicate e complesse poste dalle controversie in materia di investimenti diretti stranieri che, almeno in apparenza, non sembrerebbero trovare risposte immediate e dirette nella sistematica del recente accordo commerciale tra l’Unione Europea e il MERCOSUR, rappresentando quindi un aspetto che potrebbe ridimensionarne le potenzialità.

PAROLE CHIAVE: MERCOSUR - OMC - WTO - controversie commerciali

The main goal of this paper is to investigate the key features of the dispute settlement mechanism envisaged in the recent EU-MERCOSUR Trade Agreement and assess whether it might constitute an attractive alternative forum for solving trade disputes also in light of the ongoing crisis of the WTO dispute settlement system. In this context, being crucial for the achievement of this goal, the paper will analyse not only the general dispute settlement provisions, but also the exact meaning and any repercussions of the inclusion of a separate, parallel dispute settlement mechanism in the Trade and Sustainable Development (TSD) chapter for trade disputes relating to TSD issues. The paper will consider potential procedural and substantive issues that would help the accomplishment of its research task. It will claim that the EU-MERCOSUR dispute settlement mechanism could indeed become a partial attractive alternative to solve trade disputes between the specific parties. Nevertheless, it will also defend the argument that there are certain aspects and issues concerning in particular foreign direct investment (FDI) disputes that will work against the dispute mechanism’s complete success.


FTAs – EU-MERCOSUR Trade Agreement – EU Association Agreements – Mixed Agreements – WTO Dispute Settlement – Trade Disputes – Investment Disputes – TSD Disputes.


I. Introduction - II. The EU-Mercosur FTA Dispute Avoidance and Resolution Mechanisms - III. The Elephant in the Room: the Absence of a Mechanism to Settle Investment Disputes - IV. The Settlement of Disputes under the TSD Chapter - V. Concluding Observations and Recommendations - NOTE

I. Introduction

‘If you interview world leaders, everybody will say they are for free trade. But what they mean by it and what they do when they say they are pro free trade, you have to watch and see’. Lee Hsien Loong   Conceived as part of a wider Association Agreement (AA) [1] including cooperation and political dialogue, the EU-MERCOSUR Free Trade Agreement (hereinafter EU-MERCOSUR FTA) is the first agreement of its kind [2] concluded by the EU with the MERCOSUR bloc. [3] Several reasons led the EU institutions to conclude a comprehensive FTA [4] with the MERCOSUR bloc in 2019. The ambition to create the largest free-trade zone in the world was certainly one of these reasons. Moreover, the crisis of the WTO and multilateralism [5] was another reason behind the EU’s acceleration and conclusion of the long-impassed negotiations between the EU and MERCOSUR, [6] and this is together with the slowdown of the Chinese and North American economies and the imposition of protectionist measures against the liberal model of tariff reduction by the former President of the U.S. Donald Trump. [7] MERCOSUR was also an ideal candidate for an FTA in terms of economics and politics. Economically, EU exports to MERCOSUR countries would increase as a result of the drastic reduction of tariff and non-tariff barriers on the main agricultural commodities and minerals exported by MERCOSUR envisaged by the new FTA, [8] while EU imports from the four MERCOSUR countries [9] would not constitute a menace to the EU’s industries, including the EU’s food and agriculture industries. [10] But a very different scenario was described by the union representatives of the European farmers, especially of small and medium beef producers, and by authoritative international human rights NGOs such as the International Federation for Human Rights (IFHR) [11] over the influx of beef produced in MERCOSUR countries without the same sanitary rules and standards as those of the EU countries [12]. The FTA could also stimulate MERCOSUR’s economic growth, allowing for the possibility that it would rapidly become less dependant on foreign assistance and aid [13]. Moreover, the EU needed to conclude a FTA to protect its geographical (GI) indications from imitations. Indirectly, this is confirmed by the fact that the EU-MERCOSUR FTA is currently the ‘largest deal ever made on geographical indications within a [continua ..]

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II. The EU-Mercosur FTA Dispute Avoidance and Resolution Mechanisms

A. Formal Consultations as the First Step in Dispute Resolution. – Consultations offer a chance to the parties[25] to clarify relevant facts and achieve information and that is not the only advantage they offer. Consultations are also cost saving, and equally important, they are time saving too, in the sense that they lead to an amicable settlement of the dispute, rather than to its referral to dispute panels. Article 3(3) of the Annex III clarifies the relationship that exists between mediation and consultation in the following linear terms: ‘Consultations … are not required before initiating the mediation procedure’. Having said that, the same Article notes, however, that: ‘a Party should normally avail itself of the other relevant cooperation or consultation provisions provided for in this Agreement before initiating the mediation procedure’. Under the EU-MERCOSUR FTA the parties shall put all their efforts to settle any contentious issue via good faith consultations, which are naturally aimed to be cooperative, rather than litigious and adversial (Article 4(1) of the DS Chapter). At this point no dispute panel exists, and, thus, there is no panel to which a dispute may be referred. Any party is entitled to ask for consultation. However, there is a procedural requirement that must be fulfilled for a request to be considered valid and effective, and in fact Article 4, par. 2 of the DS Chapter explicitly prescribes that: ‘A Party shall seek consultations through a written request to the other Party, copied to the [Trade Committee], giving the reasons for the request, including the identification of the measure at issue and the relevant provisions referred to in Article 3 that it considers applicable’. The scope of consultation is wide enough to encompass any matter and issue related to the interpretation or application of the EU-MERCOSUR FTA. At least this is the conclusion that one may safely draw from Art. 3 of the DS Chapter, where it states that: ‘The provisions of this Title [that is, the Dispute Settlement Chapter] shall apply with respect to any dispute concerning the interpretation and application of the provision of Part [X] of this Agreement, except where otherwise expressly provided’. Yet, and this is also the conclusion that flows from Article 4(6) of the DS Chapter, where it is established that: ‘During consultations, each Party shall provide factual information, so as to [continua ..]

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III. The Elephant in the Room: the Absence of a Mechanism to Settle Investment Disputes

Paradoxically, one of the key features of the EU-MERCOSUR FTA is something that is absent from it, namely an investment chapter and an ISA mechanism. As this section will try to demonstrate, this is everything but surprising. In the analysis that follows we will a) dissect the reasons behind this absence (Section III.A), b) explore what alternatives, if any, are available to the Parties (and their investors) to settle investment disputes (Section III.B), and c) advance ideas for (or we should say, speculate on) possible future developments (Section III.C). A. An appraisal of the main policy and legal reasons behind the absence of an ISA mechanism. – The (predictable) absence of ISA relates to the significantly diverging positions on the matter that the two Parties have taken. These divergencies have become deeper in the roughly two decades that it took to reach an agreement in principle in June 2019. When negotiations were launched in the early 2000s, all MERCOSUR countries except Brazil had fully entered the international investment law arena. There was a veritable explosion of (mostly) BITs concluded (mostly) in the 90s thanks to a favorable political and economic climate that spread across South America. [67] Such explosion represented quite a remarkable development for a continent in which, for decades, the so-called Calvo doctrine has been the standard position. [68] This investor-friendly climate did not last long though. Faced with dozens of investment claims brought against them in the 2000s, some MERCOSUR countries experienced backlash against investment arbitration. They did not follow the radical turn taken by some members of the so-called “ALBA” movement, which literally turned their back on the system. [69] However, their attitude significantly changed in the wake of some high-profile disputes which ignited public opinion in their respective countries. [70] The enthusiasm for investment treaties and arbitration that they had showed in the 1990s and early 2000s has therefore vanished at the turn of the decade. Brazil followed an entirely different trajectory. After decades of fierce opposition to the system in line with the regional posture, this country joined the investment-friendly party in the 1990s and signed 14 BITs under the liberal government led by Fernando Henrique Cardoso. However, they were never ratified by the Brazilian Congress for a number of political and legal reasons, including their [continua ..]

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IV. The Settlement of Disputes under the TSD Chapter

In line with all other FTAs concluded by the EU, [98] under the EU-MERCOSUR FTA disputes arising out of the TSD Chapter (hereinafter: TSD disputes) are excluded from the scope of application of the general DS Chapter. [99] This effectively means that TSD disputes are subject to a dedicated mechanism, which differs from the general one in some significant aspects. This Section will at first briefly recall these differences (sub-Section IV.A), [100] and at second will attempt to critically assess the rationale behind the choices made by the EU-MERCOSUR FTA framers (sub-Section IV.B). A. Overview of the TSD Dispute Settlement Mechanism. – The TSD Chapter of the EU-MERCOSUR FTA makes provision for a three-staged dispute settlement system. The first and second stage are set out in Article 16, according to which the Parties shall at first trigger consultations by delivering a written request to the other Party clearly highlighting the legal issue at stake. The objective of these governmental consultations is to reach a mutually satisfactory resolution with the possible support of relevant third parties if need be.[101] Should a Party consider that the matter needs further discussion,[102] the second stage may be initiated by making a request in writing to the TSD Sub-Committee, [103] which also must endeavor to reach a mutually satisfactory resolution of the matter. Contrary to the governmental consultations, which are mandatory, the Sub-Committee stage is optional. As set out in Article 17(1), the first and second stage are meant to be exhausted within 120 days of the first written request. When this time has elapsed, the Parties can request the establishment of a Panel of Experts. The Panel of Experts is effectively the dispute settlement body of the TSD Chapter. Its composition follows the rules used for the general Dispute Settlement body under the relevant provisions of the EU-MERCOSUR FTA, [104] yet it draws from a different list of 15 individuals established by the TSD Sub-Committee. [105] These are individuals who have “specialised knowledge of, or expertise in issues addressed in [the TSD] Chapter including labour, environmental or trade law”. [106] The Panel of Experts is to issue an interim report within 90 days and a final report within an additional 60 days. The report will “set out the findings of facts, the applicability of the relevant provisions and the basic rationale behind any [continua ..]

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V. Concluding Observations and Recommendations

This paper has reached four main conclusions on the dispute settlement of the EU-MERCOSUR FTA. The first and more general conclusion is that an efficient DS system, namely a system that is able to deliver fully enforceable results and at the same time to show with clarity the commitments of the EU and MERCOSUR countries to comply with their contractual duties, must become a top priority for the future process of legal revision of the unfinished texts of chapters and annexes to the EU MERCOSUR agreement. [128] And yet this is notwithstanding the DS provisions and mechanisms in the FTAs are indeed, more often than not, accused of operating as a means at the disposal of economically developed countries for ‘exporting’ or – even worse – for imposing their laws to other less developed countries that are party to the FTA. [129] And, moreover, this is also notwithstanding the fact that DS mechanisms and provisions in the FTAs were and are often criticized for overriding or circumventing national sovereignity and domestic court systems. [130] It is, in fact, our firm view that without effective and reformed dispute settlement provisions and mechanisms in the EU-MERCOSUR FTA, European and Mercosurian businesses will hardly be inclined to risk their capital. The second conclusion concerns the need to introduce a review process of the arbitral award. A process for appeal along the lines of the WTO’s standing Appellate Body can be a good (though not the only) solution to address this need, namely to increase the effectiveness and efficiency of the DS provisions applicable to trade issues under the EU-MERCOSUR FTA. The third conclusion concerns the (non-existent) investment component of the EU-MERCOSUR FTA. It has been submitted that despite the significant divergences currently existing between the Parties, some encouraging sign of convergence on investment matters can be identified. On the basis of this conclusion, we have expressed our hope that a compromise will be found so that investors of both sides can be adequately protected against the inevitable risks that the deal entails. [131] However, we have foreseen the unlikelihood that such compromise will be found in the near future. The fourth and final conclusion has to do with the dispute settlment mechanism included in the TSD Chapter. We have observed that the current structure of the TSD dispute settlement mechanism logically reflects the EU general [continua ..]

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