Fit for Whose Purpose?: How Panelists Interpret Labor Rights in Trade, and What That Tells Us about the Trade/Labor Relationship

While many of us were celebrating the holidays with family, an important law review article dropped silently and inconspicuously into the fray. That article, Fit for Purpose: The Extent and Enforcement of International Trade Agreement Labor Obligations After Guatemala – Labor Obligations Decision, was written by Professor Kevin Banks, who served as a panelist on the controversial US-Guatemala labor case under the Dominican Republic-Central America – United States Free Trade Agreement (“CAFTA-DR”).

The article is a stiff-upper-lipped rejoinder to the panel report’s symphony of criticism. Some of that criticism accused the panelists of ignoring the fundamental principles of the International Labor Organization (ILO) rights that were incorporated into the CAFTA-DR. Rather than bow to that criticism, Professor Banks leans in, attempts to justify the report’s myriad flaws, and confirms that these panel decisions are as much about their authors as they are about the facts.

Referencing the panel’s interpretive reasoning concerning the Agreement’s “in a manner affecting trade” language, Professor Banks asserts that the report “stands to influence how dispute settlement panels interpret the similarly worded obligations in many other trade agreements,” including U.S. and Canadian trade agreements. His defense of and insight into the panel’s decision-making thus warrant our attention.

This post will not do the complexities of the specific legal arguments involved in that case justice, nor is that my intention. Instead, I hope to shed light on a broader question: Whether trade agreements that incorporate external, multilateral instruments such as the ILO’s 1998 Declaration should outsource the interpretation of those instruments to panelists selected by governments. This question is particularly salient when the instruments in question regulate social rights. The selected panelists will not necessarily be familiar with those instruments or, in Banks’ case, their familiarity will be obscured by interpretive devices that undermine the very rights that the trade agreements claim to protect. The result, particularly as these labor cases continue to metastasize under various trade agreements with different panelists, will be a legal pluralism that confuses rights, objectives, and incorporated instruments, to the detriment of predictability and legitimacy.

The Guatemala – Labor Obligations Decision

On June 14, 2017, the arbitral panel established under the CAFTA-DR issued its nearly 300-page final report entitled In the Matter of Guatemala – Issues Relating to the Obligations Under 16.2.1(a) of the CAFTA-DR.

Plenty of experts have written about that report, so I will not go into detail here. Suffice it to note that the case centered on the CAFTA-DR labor chapter, found in Chapter Sixteen of the Agreement, which begins by reaffirming the Parties’

“obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998) (ILO Declaration).”

Art. 16.2.1(a), entitled “Enforcement of Labor Laws,” stipulates

“A Party shall 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, after the date of entry into force of this Agreement.”

The case arose from a 2008 complaint filed by the AFL-CIO and Guatemalan trade unions alleging that Guatemala failed to enforce its labor laws effectively under the CAFTA-DR labor chapter. The complaint took nine years to percolate through the U.S. government’s procedures, the Agreement's dispute settlement procedures, and ultimately to a final panel report. The panelists ruled in favor of Guatemala, despite evidence of pervasive abuses of workers’ rights in trade sectors in Guatemala in violation of “an obligation enunciated in the ILO’s Declaration …and grounded in the ILO Constitution….”

The panel found that Guatemala had violated its commitments under the labor chapter to “respect, promote and realize” the ILO’s fundamental rights. Yet, it also found that the United States failed to satisfy its burden of proving that those labor infractions had been carried out “in a manner affecting trade” with the United States.

The panel focused on the fact that “labor laws, like other regulations, tend in their ordinary operation to impose administrative costs on employers.” A trade party could establish a failure to effectively enforce another party’s labor laws through a sustained or recurring course of action of inaction “in a manner affecting trade” if that action or inaction demonstrably “confer[red] some competitive advantage on an employer or employers engaged in trade between the Parties…”. Noting that this was a “question of fact,” the panel found that the United States had failed to show “that the enterprise or enterprises in question export to CAFTA-DR Parties in competitive markets or compete with imports from CAFTA-DR Parties” and that those effects were “sufficient to confer some competitive advantage on such an enterprise or such enterprises….” 

The Backlash

Labor and trade experts, rare bedfellows, seem to agree that the CAFTA-DR labor decision was wrongly decided. In their critical report of the decision and its processes, entitled Wrong Turn for Workers’ Rights, labor advocates Lance Compa, Jeff Vogt, and Eric Gottweild point out that two of the three panelists were international trade and dispute resolution experts who frequently represented corporations, while Professor Banks was the sole labor law expert. Maybe he was outnumbered?

Noting that the panelists relied on 38 trade disputes and not on labor disputes, and on WTO reports while discounting ILO reports, the authors speculate that “the imbalance of trade and labor backgrounds of panel members contributed to the decision [that was] clearly based on a narrow, trade-oriented analysis divorced from labor law practice – particularly in a developing country like Guatemala.” They also note that no single person representing the trade unions who had filed the complaint or the workers themselves was allowed to speak at the hearing.

Rejecting the panel’s interpretation of “a manner affecting trade,” the authors argue that the panel was distracted by the missing “costs” associated with labor infractions rather than focusing on the “higher importance” of labor laws and labor provisions – which is “protecting workers’ exercise of fundamental rights.”

Through a trade lens, Kathleen Claussen argues that traditional dispute settlement frameworks are ill-equipped to deal with “trade-plus” commitments like labor rights. She points out that disagreements over the purpose of labor commitments led to a “cacophony of rationales and basic principles.” Even objectively, “there are also procedural or evidentiary elements that make labor commitments more challenging to illustrate than traditional trade areas such as tariffs or subsidies.”

Professor Banks’ Response

Banks quickly proves that he was not an outnumbered labor voice. Instead, he dismisses the scholarly criticism for failing to understand the purposes of labor provisions “and what they imply about the extent of obligations.” He argues that the CAFTA-DR panel imposed a workable evidentiary burden, requiring “proof of competitive advantage” but not “data drawn from employer records” as alleged. The United States could have satisfied that burden by providing “credible, but approximate, information regarding how many workers were affected by that failure, in what way, for how long, and on the basis of reasonable inferences regarding effects on employers, in the light of the ordinary operation of labor law and/or the ordinarily expected consequences of unremedied labor law violations.”

Focusing on interpretive matters more generally, Banks argues that “where a clear statement of purpose is lacking, one’s interpretation of the extent of obligations supports inferences about why those obligations exist.” Given the ubiquity of labor chapters, and the use of the ILO’s instruments and rights to define the relevant trade commitments, Banks summarizes how the panel viewed its role in defining those obligations:

 “It follows that a convincing account of extent of obligations will often rest on a convincing account of purposes, that changes to or clarifications of extent of obligations imply changes to or clarifications of purposes, and that a construction of extent of obligations that does not correspond to stated purposes, or vice versa, should be resisted unless agreement text makes it clear that none other is possible.”

Addressing the panel’s consideration of those purposes and obligations, Banks argues that the panel interpreted the phrase “manner affecting trade…in light of the context and purposes of the Article 16.2.1(a) obligation within the CAFTA-DR, and the purposes of the agreement itself.”

Banks recalls that the panel read Art. 16.2.1(a) in conjunction with Art. 16.1 (which references the ILO) together with other “objectives of the Agreement” that promoted “conditions of fair competition in the free trade area….” The panel interpreted “fair” conditions of competition to be affected “when international competition operated to transmit incentives that tend to undermine efforts to recognize and protect labor rights through domestic law that the labor commitments under Chapter 16 centered on.” The panel thus “observed that treating a failure to enforce labor laws that conferred some competitive advantage in trade as ‘affecting trade’ was consistent with a coherent account of how Article 16.2.1(a) serves the objectives of the agreement, and with the focus of the Agreement’s objectives on trade.”

The panel’s finding, Banks insists, “did not preclude the possibility that other types of effects could be ‘in a manner affecting trade,’ in light of other potential Agreement or labor chapter purposes.” Banks then advances various arguments to address those “other" purposes.

First, Banks disputes suspicions that “other” purposes could be protectionist. He notes that plenty of legitimate trade provisions likewise afford an unfair competitive advantage in trade. Consequently, he reasons, it makes no sense to argue protectionism on the grounds of “labor obligations without an independent account of why they receive priority among the myriad of possible competitive advantages that could be harmonized in the interests of creating a level international playing field.” Noting that labor chapters regulate “vaguely defined claims,” he concludes that protectionists had “shown little enthusiasm for labor rights chapters as a response to their concerns.”

Second, Banks offers that trade agreements are not intended to “advance a social development agenda.” While conceding that the ILO’s mission includes “preventing destructive forms of international competition between nations,” Banks concludes that neither U.S. nor Canadian trade agreements pay attention to development agendas. If they did, “one would expect to find direct reference to them” as we do in EU trade agreements.

More broadly, Banks urges us to “turn to the role of labor norms themselves within international trade” to understand the purposes of labor chapters in trade agreements. He teaches us that labor and employment laws are understood “within many polities to embody strongly held social norms” that serve various conceptions of justice. Their regulation “protects socially valued interests that might otherwise be harmed…[and] norm-abiding businesses from losing out for being norm-abiding” and “prevents norm-breaking businesses from unjustly benefitting from the harms that they inflict.” In light of those values, “failures to provide for and effectively enforce internationally recognized labor rights can constitute breaches of fairness ground rules for economic competition.”

Finally, Banks reminds us that broader interpretations may have been possible had the United States’ allegation not been so narrowly focused on “the proven course of failure to enforce labor rights affected conditions of competition by influencing or making a material impression upon them.” Even so, he cautions that the United States’ legislative history will be unhelpful in trying to glean interpretivist meaning – the original intention was the result of hard-won political compromise, and ambitions have since shifted. He concludes by suggesting that if the phrase “in a manner affecting trade” raises more questions than it answers, future negotiators should drop it altogether.

A Few Reflections

Still with me?

I began this post by noting that my concern with the arbitral panel, and Professor Banks’ insight into the intention of the CAFTA-DR interpreters, has little to do with the panel report and more to do with the broader process of outsourcing the interpretation of the ILO’s labor rights to panelists under trade agreements. That process leaves workers incredibly vulnerable. The Guatemalan workers in the CAFTA-DR case were mistreated, were essentially ignored for nine years, and were left with nothing at the end. These decisions matter, particularly when panelists’ interpretations of the ILO’s rights in trade agreements serve to undermine those rights.

Contrary to Banks’ assertions, the panel could have interpreted the CAFTA-DR labor chapter to embody the ILO’s 1998 Declaration and its principles more purposively. If you will recall, in January 2021, a different arbitral panel released its final report interpreting similar labor provisions in a dispute under the EU –Korea Free Trade Agreement. I was equally unimpressed with that decision (maybe I am just insufferable). However, the contrast in the interpretive methodology between the two panels bears mention.

In examining the same language cited above in the CAFTA-DR, Art. 16(1), the EU-ROK panel emphasized that the incorporation of the ILO’s Declaration and rights “clearly indicate[s] that any obligation arising from the first sentence has been defined by the Parties to the full extent of their internationally accepted meaning.” Dismissing Korea’s reliance on the CAFTA-DR report, the panel found that “[t]he language of ‘fundamental rights’ in the context of the ILO Constitution and 1998 Declaration … exclude[s] the possibility that this domestic commitment to achieve or work towards these key international labour principles and rights exists only in relation to trade-related aspects of labour.”

Imagine that the CAFTA-DR panel, like the EU-ROK panel, had interpreted the express incorporation of the ILO Declaration similarly. Professor Banks’ arguments concerning the missing sustainable development framework or agenda would be moot. The ILO Declaration’s Preamble emphasizes its objective “to ensure that, in the context of a global strategy for economic and social development, economic and social policies are mutually reinforcing components in order to create broad-based sustainable development.” By expressly incorporating the “obligations as members of the International Labor Organization (ILO) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998),” as the CAFTA-DR does, the Agreement arguably incorporates the Declaration’s “global strategy for economic and social development…”. And if the CAFTA-DR’s labor chapter incorporates the ILO Declaration in that manner, then evidence of Guatemala’s sustained violations of the ILO’s fundamental labor rights in trade sectors should have sufficed. Under that interpretation, the United States should have won its case.

A group of panelists under CAFTA-DR read the incorporation of the ILO Declaration incredibly restrictively, and a group of panelists under the EU-ROK read the incorporation of the ILO Declaration incredibly broadly. Either interpretation is, of course, permissible under these labor chapters. Professor Banks is no more correct than he is incorrect.

The ILO has a critical role to play here. It is best positioned to interpret its own standards and Declaration and identify the prevalence and impact of labor infractions in its member countries. I am currently exploring how to reinvigorate efforts within the ILO to create an authoritative labor tribunal under Art. 37(2) of its Constitution that could adjudicate these matters. However, even if the ILO establishes such a tribunal, States haven’t shown a willingness to give the ILO a formal role in their trade agreements, despite touting new “worker-centered” trade policies. Perhaps, if nothing else, the CAFTA-DR report is the canary in the coalmine, reminding even powerful governments like the United States of the unpredictability in the ubiquitous labor/trade relationship that they have created.

Fit for Whose Purpose?: How Panelists Interpret Labor Rights in Trade, and What That Tells Us about the Trade/Labor Relationship