Trade Act Restrictions on the Extension of Most-Favored-Nation Rights

• Court: Department of Justice Office of Legal Counsel
• Decided: August 31, 1987
• Status: Published

Opinion

Trade Act Restrictions on the Extension of Most-Favored-Nation Rights

A trade agreem ent negotiated with Canada to be implemented pursuant to the “fast track” authority provided by the Trade A c t of 1974, as amended, is subject to § 102(b)(3) o f the 1974 Act, 19 U.S.C. § 2112(b)(3). T hat section prohibits the extension to other countries o f any trade benefits received by a country under a “fast track” agreem ent if such agreement provides for a reduction or elimination o f any duty im posed by the United States. As a matter of dom estic law, this prohibition w as intended to, and does, im pair the automatic operation of m ost-favored-nation clauses in various treaties to which the United States is a party. The im pairm ent caused by § 2112(b)(3) can be reduced in this instance by simultaneously con­ cluding an agreem ent with C anada addressing non-duty benefits and a separate agreement addressing duty reductions. Section 2112(b)(3) would prevent only the benefits given to C anada under the latter agreement from being extended to third countries enjoying applicable m ost-favored-nation rights. Furthermore, any legislation implementing the trade agreement with C anada would not operate to repeal the operation o f § 2112(b)(3) in this case unless Congress expressly provided to that effect in the legislation. Finally, the United States’ international obligations with respect to m ost-favored-nation agreements have force even if such agreem ents were concluded after enactm ent o f § 2 1 12(b)(3).

August 31, 1987

M em orandum O p in io n for t h e C o un sel to the P r e s id e n t

I. Introduction

This memorandum responds to your request for our views on certain legal issues that may arise upon the conclusion of a U.S./Canadian trade agreement (Agreement) which the Administration is presently negotiating in the expecta­ tion of submitting it to Congress for implementation under special “fast track” authority provided by the Trade Act of 1974, as amended. Specifically, your Office has asked whether § 102(b)(3) of the Trade Act, 19 U.S.C. § 2112(b)(3), which applies to agreements negotiated under “fast track” authority, restricts as a matter of domestic law the extension of trade benefits received by Canada under the Agreement to other foreign nations which have most favored nation rights (MFNs) under Friendship, Commerce, and Navigation, Treaties (FCNs) or other bilateral agreements.1 By operation of applicable MFN clauses in 1 The President, o f course, has independent authority to negotiate free trade agreem ents as an aspect o f his plenary pow er to conduct foreign affairs. See generally , United States v. Curtiss-Wright Export Corp., 299 U .S. 319 (1936). This independent authority may not be restricted in any way A ccordingly, the President m ay conclude th e A greem ent under his o w n independent authority and avoid entirely the restrictions imposed by § 2112. C ongress m ay, however, agree, as it has under § 2112, to consider legislation implem enting an agreem ent on an expedited basis only on th e condition that the President comply w ith certain requirem ents that are o th erw ise constitutional.

128 such agreements the United States may be obligated under international law to extend benefits received by Canada under the Agreement to certain third countries. If § 2112(b)(3) frustrates the operation of any such MFN clauses, you have asked whether legislation implementing the Agreement could be deemed to repeal these restrictions insofar as they affect the Agreement. Finally, you have asked whether MFN clauses in agreements which were concluded after the enactment of § 2112(b)(3) into our domestic law require the extension of trade benefits included in agreements negotiated under § 2112(b)(3). We have concluded that 19 U.S.C. § 2112(b)(3) does prohibit the automatic extension to third countries of trade benefits received by Canada under the Agreement, but only if the Agreement provides for the elimination or reduction of any duty imposed by the United States. In other words, if the Agreement were to provide Canada solely with benefits other than tariff or duty reductions, the United States would be at liberty to comply with any interna­ tional obligation that requires it to extend to a third country by operation of treaty the trade benefits Canada received.2 On the other hand, if the Agreement eliminated or reduced a United States duty, the United States would not be able to comply with applicable MFN clauses by automatically extending to third countries benefits granted to Canada. Moreover, we believe that if the Agree­ ment were to reduce United States duties, § 2112(b)(3) would frustrate the automatic extension of any benefits, regardless of whether the trade benefit to be extended is itself a reduction of a duty or a benefit unrelated to duty reduction. Second, we have concluded that the legislation implementing the Agreement cannot be viewed as an implicit repeal of § 2112(b)(3)’s prohibition on the automatic extension to third countries of benefits provided to Canada under the Agreement. Accordingly, in order to permit the extension of these benefits to third countries Congress must explicitly provide for the extension. Finally, we believe that the international obligations of the United States under treaties concluded after enactment of § 2112(b)(3) into domestic law are not modified by § 2112(b)(3)’s prohibition on the automatic extension of MFN rights, unless the text of the treaty or its negotiating history indicates that the foreign signatory agreed that trade benefits included in agreements negotiated under § 2112(b)(3) did not have to be extended under applicable MFN clauses.

II. Analysis

A. M ost F avored Nation Rights under Existing Treaties

Certain Friendship, Commerce and Navigation Treaties or other bilateral treaties entered into by the United States which accord most favored nation

2 C onsequently, in order to reduce the num ber o f international obligations that § 2112(b)(3)’s prohibition may cause to be im paired, the U nited States may wish to conclude one agreem ent with C anada addressing non-duty trade b enefits and a separate agreem ent addressing duty reductions. Only benefits granted under the latter agreem ent w ould be subject to § 2 1 12(b)(3).

129 rights to foreign countries require the United States to extend to such countries the benefits Canada might receive under a U.S./Canadian trade agreement. Although we have not had the opportunity to consider closely each individual treaty currendy in force which grants MFNs to foreign countries and have had to rely on the views of the State Department concerning the scope of such treaties,3 we have nevertheless reviewed a representative sample of FCNs which grant unconditional MFN rights and concur in the State Department’s judgment that certain treaties would, by their terms,4 obligate the United States to grant their signatories the same trade benefits the United States might accord to Canada. Therefore, assuming that at least some treaties would impose this obligation under international law, and that some United States treaty partners could request equal treatment, our principal focus here has been to determine to what extent Congress under domestic law has precluded United States compli­ ance with these international obligations.5

B. Trade A c t o f 1974

Under 19 U.S.C. § 2112 (§ 102 of the Trade Act), Congress has provided the President with authority to receive special consideration of free trade agree­ ments he negotiates, but has circumscribed this authority through a variety of restrictions. If the President uses this authority to negotiate an agreement, legislation implementing the agreement will be put on a “fast track” and

3 See State D epartm ent M emorandum, “ Im pact on U.S. Friendship, C om m erce and N avigation T reaties." T he S tate D epartm ent is o f the view that th e scope o f som e treaties granting MFN rights by their term s would not g ran t a foreign state all the benefits o f a trade agreem ent w ith C anada. See State D epartm ent M em oran­ dum at 1 -2 . F o r exam ple, the standard FCN treaty provides an exception for “goods” if the agreem ent relating to goods is perm itted by the General A greem ent on Tariffs and Trade and if the FCN treaty partner consults w ith the other. Id. a t 1. In the few treaties w here such exception is not m ade (those w ith Saudi Arabia, Yemen, L iberia, Iraq, El S alvador, H onduras, C osta R ica and B olivia) trade with the signatories is said to be small. Id. M ore co m p licated is the situation for serv ices and investm ent. Both o u r FCN treaties with m ajor trading p artners (e.g. G erm any, Japan, Italy, N etherlands, Israel and K orea) and B ilateral Investm ent Treaties (which have b een signed w ith ten countries, but n o t yet ratified) evidently accord fairly unconditional MFN rights. Id. at 3 -4 . In ad dition, the U nited States h as entered into various O rganization for Econom ic Co-O peration and D evelopm ent “U ndertakings With R egard to C apital M ovem ents” and “U ndertakings W ith Regard to C urren t Invisible O perations” which also a re said to grant broad M FN obligations in services and investm ent. Id. at 4. 4 The State D epartm ent Memorandum states: [T ]he standard FCN imposes a sw eeping MFN obligation w ith respect to the right o f alien n atio n als o r com panies to: (a) e stab lish and maintain branches, agencies, offices, factories and other establishm ents ap p ro p riate to the conduct of their business; (b) o rganize com panies under th e general com pany law s o f such other Party, and to acquire m ajority in terests in the companies o f such other Party; (c) control and m anage enterprises w hich they have established o r acquired; and (d ) engage in all types o f com m ercial, industrial, financial and o ther activity for gain (services) w ithin th e territo ry o f each Party. Id. at 2 -3 . M oreover, the standard FCN pro v id es that “ ‘nationals and com panies o f either party . . . shall in any ev en t be accorded m ost-favored-nation treatm ent w ith reference to the matters treated in the present A rtic le .’” Id. 5 C ongress can , o f course, by statute o v errid e and nullify th e dom estic effect o f any treaty obligations the U nited States m ight have. See generally Whitney v. Robertson , 124 U.S. 190 (1888).

130 receive expedited consideration for congressional approval. See generally 19 U.S.C. § 2191.6 This grant of authority includes both the power to conclude bilateral agreements which do not result in the reduction of duties or tariffs and the authority to conclude bilateral agreements making reductions in duties. Section 2112, however, imposes a variety of additional requirements when the President is engaged in the negotiation of an agreement that reduces duties.7 Moreover, Congress has prohibited any trade benefit included in a treaty that reduces a duty of the United States from being extended to third countries simply by operation of MFN clauses in a treaty between the United States and the third country. Section 2112(b)(3) provides: Notwithstanding any other provision of law, no trade benefit shall be extended to any country by reason of the extension of

6 Under the fast track authority, the President negotiates the trade agreem ents and notifies C ongress ninety days before they are to take effect o f his intention to enter into the agreem ents. A fter consultation with certain congressional com m ittees, the trade agreem ents may be signed and together w ith a draft im plem enting bill and a statem ent o f proposed adm inistrative actions are subm itted to C ongress. O nce in Congress, the bill is entitled to expedited consideration. For exam ple, the bill can be autom atically discharged from com m ittee evaluation to allow consideration by the full H ouse o r Senate after 45 days. No am endm ents may be attached to the bill, and there is im posed a time lim it on debate in both the H ouse and Senate The proposed legislation m ust be acted upon by C ongress w ithin approxim ately sixty legislative days. 19 U.S.C. §§ 2112,2191 (1982). It should be noted that the present statutory scheme denies the “fast track” option to the President if “the Com m ittee on Finance o f the Senate o r the C om m ittee on W ays and M eans o f the H ouse o f R epresentatives disapproved o f the negotiation o f such agreem ent.” 19 U.S.C. § 2 1 12(b)(4)(B)(ii)(U). This provision is unconstitutional. Congressional com m ittees may not exercise legislative pow er by making decisions that have “the purpose and effect o f altering the legal rights, duties, and relations o f persons . . . outside the Legislative Branch.” INS v. Chadha, 462 U.S. 919, 952 (1983). We believe, how ever, a strong argum ent can be m ade that § 211 l(b)(4)(B )(ii)(II) is severable under the reasoning o f Alaska Airlines v. Brock, 480 U.S. 678 (1987). The general rule concerning severability is that “unless it is evident that the Legislature w ould not have enacted those provisions which are w ithin its powers, independently o f that w hich is not, the invalid part m ay be dropped if w hat is left is fully operative as law .” Buckley v. Valeo, 424 U.S. 1, 108 (1976) (per curiam ) (quoting Champhn Refining Co. v. Corporation Comm’n o f Oklahoma, 286 U.S. 21 0 -2 3 4 (1932)). In Alaska Airlines, the C ourt applied this general rule to hold that an unconstitutional legislative veto provision was severable from the A irlines D eregulation A ct of 1978.480 U.S. at 6 8 4 -9 7 . The Court reasoned that C ongress w ould have enacted the statute even without the objectionable provision. Id. at 697. It appears to us that the “fast track” authority like the legislative veto considered in Alaska Airlines, is not so controversial that C ongress w ould have been unw illing to make the delegation w ithout it. M oreover, the detailed requirem ents imposed on the President in other parts o f the statute, see, e.g. 19 U.S.C. § 2 1 12(b)(4)(A), suggest that the legislative veto provision is not crucial. 480 U.S. at 688 (detailed requirem ents imposed on Executive Branch indicated that veto provision could affect only relatively insignificant actions by Secretary o f Transportation). Finally, nothing in the legislative history o f § 2112 suggests that Congress was particu­ larly concerned about the Congressional disapproval m echanism. See 480 U S. at 691 (C ongress' scant attention to legislative veto suggests that A ct would have been passed in its absence). Thus, it is our view that a court would find § 2 1 12(b)(4)(B )(ii)(lI) severable. 7 These procedures are described in 19 U.S.C. § 2 1 12(b)(4)(A): N otw ithstanding paragraph (2) [lim iting authority to negotiate a tariff reduction agreem ent with Israel], a trade agreem ent that provides for the elim ination o r reduction of any duty imposed by the United States may be entered into under paragraph (1) with any country other than Israel i f — (i) such country requested the negotiation o f such an agreem ent, and (ii) the President, at least 60 days prior to the date notice is provided under subsection (e) (1) o f this section — (I) provides w ritten notice o f such negotiations to the Com m ittee on Finance o f the Senate and the Com m ittee on W ays and M eans o f the H ouse o f Representatives, and (II) consults w ith such com m ittees regarding the negotiations o f such agreem ent.

131 any trade benefit to another country under a trade agreement entered into under paragraph (1) with such other country that p ro vid es f o r the elimination o r reduction o f any duty im posed by the U nited States.

19 U.S.C. § 2112(b)(3) (emphasis added.) Congress appears to have intended that this section frustrate the automatic operation of MFN clauses in FCN treaties. See H.R. Rep. No. 1092, 98th Cong., 1st Sess. 16 (1984) (subsection precludes any possibility, as a matter of domestic law, of extension through court decision or executive action of trade benefits to other countries pursuant to any existing treaties or executive agreements without further congressional approval). It is also clear that Congress intended § 2112(b)(3), as presently formulated, to apply only to trade agreements that reduce United States duties, because prior to a technical correction made in 1985 to the Trade Act, § 2112(b)(3) applied to all trade agreements negotiated under the “fast track” authority.8The change made in 1985 purposely limits the scope of § 2112(b)(3) to a trade agreement negotiated under the authority of the Trade Act “that provides for the elimination or reduction of any duty imposed by the United States.” Pub. L. No. 99-47, 99 Stat. 82 (1985).9 Accordingly, we are of the opinion that under § 2112 trade benefits that Canada may receive under an agreement that does not reduce United States duties can be extended to countries with appropriate MFN clauses under FCN treaties by operation of those treaties and without additional congressional approval. We also believe that in order to reduce the number of international obligations which the § 2112(b)(3)’s prohibition may cause to be impaired the United States may simultaneously conclude an agreement with Canada ad­ dressing non-duty trade benefits and a separate agreement addressing duty reductions.10 Section 2112(b)(3) would prevent only the benefits given to 8 Section 2 1 12(b)(3) then provided: N otw ithstanding any o th er provision o f law, no trade benefit shall be extended to any country by reason o f the extension o f any trade benefit to another country under a trade agreem ent entered into u n d er paragraph (1) with such o th e r country. 9 The H ouse W ays and M eans Com m ittee report concerning the technical correction m akes the purpose of the change clear beyond doubt: Section 8 [o f H .R. 2268, a bill to im plem ent th e free trade agreem ent w ith the U nited States and Israel] m akes five technical corrections to the T rade and T a n ff A ct o f 1984 and to the T rade Act o f 1974 related to the authorization an d adm inistration o f the [U .S./Israel] Agreement. * * *

Paragraph (1) o f subsection (b) am en d s section [2 1 12(b)] o f the T rade Act o f 1974 as added by section [2112(b)(3)] o f the Trade a n d T ariff A ct o f 1984, to clarify that the prohibition on ex ten sio n o f any trade benefit u n d e r a trade agreem ent being extended to any other country ap p lies to trade agreem ents providing for the elim ination or reduction o f any U.S. duty, as opposed to agreem ents on nontariff barriers. H .R . R ep. No. 64, 99th C ong., 1st Sess. 1 8 -1 9 (1985). See also S. Rep. No. 55, 99th Cong., 1st Sess. 10 (1985). 10 O f course, in so far as the non-duty a n d duty agreem ents were related to one another (e.g. through provisio n s w hich treat a breach o f one agreem ent as equivalent to the breach o f the other), it w ould be more d ifficu lt to argue that the agreements w ere separate. A s long as the agreem ents, how ever, are not textually integrated and are subm itted to Congress fo r separate consideration and im plem entation, we believe that the agreem en ts are to be considered as separate for the purposes o f § 2112(b)(3).

132 Canada under the latter agreement from being extended to third countries under applicable MFN clauses. On the other hand, § 2112(b)(3) by its express terms prohibits trade benefits that Canada receives under an agreement reducing United States duties from being extended by operation of treaty to those who hold MFN rights under FCN treaties or other agreements. Moreover, we have concluded that the term “trade benefits” encompasses both benefits in the form of duty reductions and trade benefits that are unrelated to duty reductions. First, § 2112(b)(3) uses the term “duty” as well as “trade benefit.” It is an axiom of statutory construction that different terms, particularly technical terms, in a statute are to be given differ­ ent meanings unless the context indicates otherwise. See e.g., Ocasio v. Bureau o f Crimes Correction Division o f Workers Compensation, 408 So. 2d 751, 753 (Fla. Dist. Ct. App. 1982). Moreover, it is clear from the conference report on the 1984 amendments to the Trade Act that Congress enacted § 2112(b)(3) to prevent certain U.S. treaties from being interpreted “to extend automatically to [anjother party, by virtue of most-favored-nation provisions, any tariff or other trade benefit." H.R. Rep. 1156,98th Cong., 1st Sess. at 152 (emphasis added).11 You have also asked whether future legislation implementing a U.S./Cana- dian trade agreement could be viewed as repealing, pro tanto, § 2112(b)(3)’s prohibition on the extension of MFN benefits by the operation of treaty on the ground that the implementing legislation was enacted by Congress subsequent to § 2112(b)(3). In the absence of explicit language repealing the § 2112(b)(3)’s prohibition, we believe that the mere passage of implementing legislation would leave the prohibition intact. Section 2112(b)(3) specifically contem­ plates that the limitation on extending MFN rights would apply despite the conclusion of a treaty that reduced United States duties unless Congress specifically approved the extension.12 Accordingly, it is not possible to view legislation implementing a U.S./Canadian tariff reduction trade agreement as pro tanto repealing § 2112(b)(3)’s limitation. The final question you have asked concerns the status of any bilateral trade agreements containing MFN rights entered into after enactment of § 2112(b)(3) in 1984. You have asked whether the fact that § 2112(b)(3) existed at the time such an agreement was concluded would be deemed to release the United States from obligations under the agreement that are inconsistent with that provision. We believe that the United States could not successfully argue that the existence of § 2112(b)(3) under its domestic law modified its obligation under an agreement concluded after its enactment unless the text of the agree­ ment or its negotiating history demonstrate that the foreign signatory agreed that the obligation should be so modified. It is a fundamental principle of the 11 There is no doubt that the words "trade benefit" include benefits related to both goods and services because the term “international trade" is defined in the statute as including: (A ) trade in both goods and services and (B) foreign direct investm ent by the U nited States persons, especially if such investm ent has im plications for trade in goods and services. 19 U.S.C. § 2 1 11(g). 12 See H .R . Rep. No. 1092, 98th Cong., 1st Sess., at 16.

133 interpretation of international agreements that, with exceptions not relevant here, “a party may not invoke the provisions of its internal law as a justification for its failure to perform a treaty.” Article 27 of the Vienna Convention on the Law of Treaties, U.N. Doc. A/Conf. 39/27, May 23,1969 (Vienna Convention) (signed by the United States April 24, 1970 and awaiting ratification by the Senate).13 A contrary rule would make it extremely difficult, if not impossible, for one nation to ascertain the treaty obligations that another undertakes.14

J o h n O . M c G in n is Acting Deputy Assistant Attorney General Office o f Legal Counsel

13 A lthough we have not y et ratified the C onvention on the Law of T reaties, we believe that the C onvention generally reflects the international custom ary law which w ould be applied to international agreem ents. Fu rth er support for o u r view may be fo u n d in Article 46 o f the V ienna Convention: 1. A S tate may not invoke the fact th at its consent to be bound by a treaty has been expressed in violation o f a provision o f its internal law regarding com petence to conclude treaties as invalidat­ ing its co n sen t unless that violation was m anifest and concerned a rule o f its internal law of fundam ental im portance. 2. A vio latio n is m anifest if it w o u ld be objectively evident to any State conducting itself in the m atter in accordance w ith normal p ractice and in good faith. W e do not believe that § 2112 would be co n sid ered an “internal law o f fundam ental im portance,” as this term is reserved fo r provisions o f constitutional law. 14 See B row line, Principles o f Public International Law 610-11 (3d ed. 1979).