Steve Peers, Professor of Law, University of Essex

This post explores whether global trade liberalization through agreements like the World Trade Organization (WTO) and related free trade agreements promotes economic growth for all or widens the gap between rich and poor. It also examines if and how labor standards and environmental concerns should be considered in pursuing freer trade.

These concerns are increasingly debated in trade policy discussions, making some nations hesitant about new free trade deals or prompting calls to renegotiate existing ones. The EU, for instance, has become more assertive in enforcing labor and environmental provisions within its free trade agreements.

Recently, the EU’s enforcement strategy resulted in the first panel ruling on labor standards under one of its free trade agreements. The case involved freedom of association within the EU/South Korea free trade deal. It’s noteworthy that the EU is also actively enforcing other aspects of its bilateral free trade agreements, as seen in recent disputes with Ukraine, South Africa, and Algeria.

This post analyzes the relevant laws and the panel’s interpretation, then examines the ruling within the broader debate on trade and labor standards. Lastly, it explores the ruling’s potential implications for disputes on trade and the environment, the new EU/China investment agreement, and EU/UK disputes under the post-Brexit trade deal.

Trade and Sustainable Development Provisions in the Free Trade Agreement

The EU/South Korea trade agreement uses “trade and sustainable development” to refer to these issues, a term more common among trade lawyers than the “level playing field” phrase used in the recent UK/EU treaty. The EU/South Korea rules, similar to those in other recent EU FTAs and the EU/China investment agreement (though not yet in force), could set a precedent for potential disputes between the EU and other countries. However, the “Brexit deal” provisions go further.

Importantly, rules on “trade and labor” are not exclusive to EU agreements. Agreements with the US, for example, also contain such provisions. This panel report distinguishes itself from a ruling in a case between the US and Guatemala.

Chapter 13 of the FTA, dedicated to “trade and sustainable development,” outlines the parties’ commitment to promoting international trade that contributes to sustainable development. They acknowledge the interconnectedness of economic growth, social progress, and environmental protection as crucial elements of sustainable development. This chapter, however, is not intended to harmonize labor or environmental standards but rather to strengthen trade relations and cooperation to promote sustainable development.

Article 13.2.1 defines the chapter’s scope, stating that it applies to measures impacting trade-related labor and environmental issues within the framework of sustainable development. However, Article 13.2.2 emphasizes that environmental and labor standards shouldn’t be used for protectionist trade purposes, ensuring that no party’s comparative advantage is questioned.

Furthering this mixed message, Article 13.3, titled “right to regulate,” acknowledges each party’s right to establish its own environmental and labor protection levels and to adapt relevant laws and policies accordingly. Yet, it immediately qualifies this right by stating that each party should strive for high environmental and labor protection levels in line with internationally recognized standards and agreements.

The specific international labor standards are outlined in Article 13.4, highlighting the value of international collaboration and agreements on labor issues in response to globalization. The article reaffirms the parties’ commitment to decent work for all as a cornerstone of sustainable development, promoting international trade that supports this goal.

Article 13.4.3 emphasizes respecting, promoting, and realizing, in law and practice, the principles of fundamental rights at work, including:

• Freedom of association and the effective recognition of the right to collective bargaining
• The elimination of all forms of forced or compulsory labor
• The effective abolition of child labor
• The elimination of discrimination in employment and occupation

Article 13.5 defines international environmental standards. The post will discuss the application of this ruling to them separately.

Article 13.6 broadly addresses the links between trade and sustainable development. Article 13.7 focuses on “upholding levels of protection,” addressing the reduction of standards or failure to enforce domestic labor laws.

The Chapter concludes with rules on dispute settlement. Article 13.14 mandates consultation between parties on matters arising under the chapter. Should consultations fail to yield a settlement within 90 days, a party can request a panel of experts (Article 13.15). This panel provides recommendations, and parties are expected to make their best effort to accommodate the panel’s advice on implementing the chapter’s provisions. This process replaces the FTA’s main dispute settlement system, which is bypassed for matters arising under this chapter (Article 13.16).

The Panel Report

The EU argued that South Korea had not fully met its obligations regarding freedom of association, citing two points within Article 13.4.3 of the FTA. Firstly, South Korea’s labor law wasn’t fully aligned with ILO obligations regarding freedom of association. Secondly, South Korea hadn’t made sufficient effort to ratify core ILO treaties.

Rules of interpretation

The report asserts that provisions for a level playing field must be interpreted following standard international law interpretation rules, as outlined in Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT). This approach stems from the FTA’s requirement for dispute arbitrators to apply these rules, and in this case, the panel of experts acted in place of arbitration.

Jurisdiction

The panel then addressed its jurisdiction, a point of contention that cut to the core of the trade and labor connection. South Korea argued that since Article 13.2.1 limits the chapter to measures affecting “trade-related aspects” of labor and environmental concerns, the dispute fell outside the chapter’s purview as it didn’t directly impact trade.

Accepting this argument would have had far-reaching consequences, potentially ending not only this dispute but also jeopardizing many others under this and other EU FTAs, including the EU/China investment treaty. However, the panel disagreed, pointing to the phrase “Except as otherwise provided in this Chapter” at the beginning of Article 13.2.1, indicating exceptions to the “trade-related aspects” rule. The panel determined that Article 13.4.3, with its broad reference to ILO obligations, “fundamental rights” aspects, the commitment to abolish “all” compulsory labor, and the impossibility of ratifying ILO Conventions for only certain workers, constituted one such exception. This interpretation was reinforced by comparing it to Articles 13.4.1 and 13.4.2, which directly reference trade.

South Korea also argued that the EU aimed to harmonize labor laws in violation of Article 13.2.2. The panel refuted this, stating that harmonization implied aligning specific standards like minimum wages or maximum work hours, whereas “fundamental principles and rights at work” don’t necessitate aligning domestic labor laws or outcomes. The panel highlighted that various member states have ratified relevant conventions while maintaining distinct industrial relations systems with different outcomes. The panel also noted that Article 13.3’s domestic right to regulate is subject to upholding core standards.

The panel also rejected the argument that the EU’s aim was protectionist, citing ILO research that found no link between competitiveness and improved labor standards. However, a stronger argument could be that the EU’s claim wasn’t for a protectionist measure (like trade retaliation) due to the FTA’s limitations on remedies. This interpretation might hinder future EU claims regarding reduced labor standards, as demonstrating an impact on trade or investment would be crucial for a successful case.

The panel differentiated this case from the US/Guatemala dispute, stating that the FTA in question required parties to effectively enforce their labor laws and avoid actions impacting trade between parties. This provision mirrors Article 13.7.1 of the EU/S Korea FTA, though it includes environmental law and impact on investment. However, the EU didn’t allege a violation of Article 13.7 (failure to enforce labor laws) but rather a breach of the separate obligation for domestic labor law to meet minimum standards. Furthermore, the panel pointed out that the context of the two treaties differs, stating that the US/Central America/Dominican Republic treaty lacks the sustainable development framework and the range of international agreements present in the EU-Korea FTA.

Substance: domestic labor law

The panel then addressed the EU’s four complaints regarding South Korean labor law: a restrictive definition of “workers” eligible to join unions (excluding self-employed, dismissed, or unemployed workers); defining “trade union” to exclude groups admitting members outside the “worker” category; the requirement for union officials to be union members; and discretionary registration of trade unions.

The panel first examined Article 13.4.3, concluding that the obligation to act “in accordance with the obligations deriving from membership of the ILO” included ensuring freedom of association, even in countries like South Korea that haven’t signed specific treaties on the matter. It also determined that rulings from the ILO’s Committee on Freedom of Association were admissible.

Regarding the “ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up,” the panel clarified that the EU wasn’t claiming it was legally binding. Instead, Article 13.4.3, taken as a whole, held legal weight between the parties.

Next, the panel analyzed the legal strength of the term “commit to,” rejecting South Korea’s argument that it was merely aspirational. Instead, it ruled that this represents a legally binding obligation to uphold the principles of fundamental rights as outlined in the ILO Declaration and membership obligations.

The panel then defined these terms: “Respecting” implied a negative obligation to refrain from actions that harm freedom of association. “Promoting” signified a positive obligation for states to ensure that third parties don’t impede workers exercising their right to freedom of association. It also suggested that states should foster an environment where workers and employers can freely exercise their right to freedom of association. “Realizing” was defined as a binding commitment to achieving the principles of freedom of association, as distinct from complying with specific conventions.

Finally, the panel determined that “the principles concerning the fundamental rights” were not without legal obligation, and it dismissed South Korea’s argument that these principles lacked clarity. However, it hinted that the principles of freedom of association were clearer than those concerning forced labor, child labor, and discrimination, suggesting that cases concerning those principles might face higher burdens of proof.

Applying these principles, the panel determined that South Korea was wrong to exclude self-employed, dismissed, or unemployed workers from joining trade unions. Notably, it recognized that the issue of self-employed workers also arises under the law of some EU member states, suggesting an area for future discussion. Regarding dismissed workers, the panel highlighted inadequate safeguards against dismissal based on union-related activities.

The panel further concluded that South Korea wrongly defined “trade unions” to exclude groups with members outside the “worker” category. It noted that some unions had been deregistered due to members being dismissed, giving employers significant power over individual employees and entire unions. The panel also ruled against the requirement for union officials to be union members, stating that union members should choose their representatives.

However, the panel ruled against the EU’s complaint about discretionary registration of trade unions, stating that the evidence was inconclusive.

Substance: ratification of ILO Conventions

The treaty mandates South Korea to make continued and sustained efforts to ratify fundamental ILO Conventions and other conventions designated as “up-to-date” by the ILO. The EU’s argument focused solely on the “fundamental” Conventions.

The panel acknowledged that South Korea had yet to ratify four of the eight “fundamental” ILO Conventions, two concerning forced labor and two related to trade unions. It then addressed the legal weight of “will,” concluding that it established a binding legal obligation, contrary to South Korea’s argument that it was not truly binding.

The panel then clarified this obligation, rejecting both South Korea’s argument that the status quo sufficed and the EU’s assertion that progress toward ratification must be continuous. The obligation was deemed one of effort, not outcome, lacking a concrete requirement or timeframe.

Regarding the sufficiency of effort, the panel found South Korea’s 2019 introduction of parliamentary bills to ratify three of the treaties as adequate effort. Regarding the treaty on prison labor, it accepted South Korea’s argument that amending penal law is a lengthy process.

While the panel didn’t address the hypothetical situation of what happens once these treaties are ratified, it’s important to recall that Article 13.4.3 also mandates the effective implementation of ratified ILO Conventions. This provision already applies to ILO Conventions ratified by both parties. The panel’s analysis, by analogy, would likely apply to this provision as well, falling within its jurisdiction, requiring no demonstration of trade or investment impact, and acknowledging the legally binding nature of the term “commitment.” Notably, the obligation to “effectively implement” suggests an obligation of result, exceeding mere efforts toward ratification.

Comments

The EU secured significant victories regarding jurisdiction; the legal weight of seemingly “soft law” terms; the absence of a trade or investment impact requirement; referencing ILO Conventions; and the use of ILO “soft law”. This sends a message to other nations should the EU invoke similar provisions in other FTAs or the EU/China investment treaty. These obligations, as pointed out by the panel, also apply to the EU.

The EU also succeeded on key points criticizing domestic labor law. The panel’s close scrutiny of the practical implications of labor laws, particularly those enabling the decertification of unions through dismissal of members, is noteworthy. The EU’s failure to provide sufficient evidence on one point offers insight into future litigation strategies for such disputes.

The EU will likely be disappointed by the panel’s approach to ILO Conventions. While deemed legally binding, the panel applied a relatively low threshold for assessing South Korea’s progress towards ratification. The panel’s acceptance of a nearly decade-long delay in ratifying these conventions, particularly the leniency regarding one key convention, sends a concerning message. However, as noted, the obligation to implement ILO Conventions post-ratification, though not addressed in this report, carries a stronger obligation.

The impact of the EU’s partial success is inherently limited by the lack of enforcement mechanisms for the panel’s ruling. While the process might influence domestic opinion in South Korea, potentially prompting swifter government action, this relies on the existence of democratic processes, making it irrelevant in the context of the EU/China investment agreement.

This panel ruling coincides with the development of the EU’s trade policy. A revision of EU trade remedies law (excluding investment treaties) is nearing formal adoption, accompanied by a Commission statement including a commitment to enforce sustainable development provisions in EU FTAs. The statement prioritizes cases with serious impacts on workers or the environment within a trade context, those with systemic importance, and those legally sound.

Furthermore, the panel ruling is comparable to the 2017 CJEU judgment on the EU’s legal competence to agree on the EU/Singapore free trade agreement, which determined that the “sustainable development” provisions fell within the EU’s common commercial policy. It is notable, however, that the CJEU and the panel hold differing views on the impact of lower labor standards on trade.

Beyond the EU, the new US administration, while not as openly critical of trade liberalization, remains hesitant about its expansion. Whether this translates to outright rejection of new trade deals or a greater emphasis on enforceable labor and environmental standards remains to be seen.

In a broader context, concerns in wealthier nations about maintaining or expanding free trade without stronger labor and environmental safeguards might be reaching a turning point. This mirrors the EU’s own adoption of stricter labor and environmental regulations during the establishment of its internal market. Free trade proponents, having long resisted a strong link between trade and labor or environmental standards, might now face a choice between legalism and nativism.

Application to environmental law

Certain aspects of the panel ruling, by analogy, apply to environmental disputes. This is particularly relevant to the provisions on multilateral environmental treaties outlined in Article 13.5:

• The parties reaffirm their commitment to the effective implementation of the multilateral environmental agreements to which they are party, as reflected in their respective laws and practices.
• The parties reaffirm their commitment to achieving the ultimate objective of the United Nations Framework Convention on Climate Change and its Kyoto Protocol. They commit to collaborating on developing the future international climate change framework following the Bali Action Plan.

Firstly, interpretation according to the VCLT applies to environmental issues. The panel’s analysis of jurisdiction, by analogy, extends to environmental disputes, as Articles 13.5.2 and 13.5.3 also represent exceptions to the chapter’s focus on “trade-related” environmental aspects.

Similar to the labor provisions, the scope of these rules can be interpreted by comparing them to Article 13.5.1 (which mentions trade) and Articles 13.7 to 13.9, and within the broader context of Article 13.1 and the preamble. The indivisibility of ILO Conventions applies to environmental treaties. The limitations on harmonizing laws, the distinction between regulating and upholding core standards, and the lack of requirement to demonstrate a trade impact also apply to multilateral environmental treaties.

By analogy with the panel ruling, the terms “commit” and “commitment,” used three times concerning environmental treaties, indicate a legally binding obligation. While a commitment to cooperation lacks concrete definition, a “commitment to reaching the ultimate objective” of a treaty represents a stronger obligation than merely making efforts towards ratifying ILO Conventions as in the labor dispute.

The strongest obligation appears to be the “effective implementation in their laws and practices of the multilateral environmental agreements to which they are party”. This mirrors the commitment within the labor provisions to effectively implement ratified ILO Conventions.

This expanded interpretation of the panel report could be relevant to environmental provisions in other EU FTAs and the EU/China investment treaty.

Application to the EU/China investment treaty

The EU/China investment treaty focuses solely on investment, unlike the EU/South Korea FTA, which addresses both investment and trade. However, it doesn’t limit its scope in the same way as the EU/South Korea treaty, rendering South Korea’s jurisdictional objections (which were unsuccessful) inapplicable. Both treaties share a similar clause on their context and comparable provisions on environmental treaties.

Regarding labor standards, the non-regression and non-enforcement clauses resemble the EU/South Korea treaty. The provision on ILO standards and domestic law, and the ratification of ILO Conventions, states:

1. Each Party, adhering to its obligations as a member of the International Labor Organization (“ILO”) and its commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-up, shall respect, promote, and realize, in good faith and in accordance with the ILO Constitution, the principles concerning the fundamental rights outlined in the fundamental ILO Conventions.

2. Each Party, in line with the commitments of ILO members and the 2019 ILO Centenary Declaration for the Future of Work, commits to effectively implement the ratified ILO Conventions and work towards ratifying fundamental ILO Conventions. Specifically, each party should make sustained and continued efforts to ratify fundamental ILO Conventions No. 29 and 105 if they haven’t already done so. The Parties will also consider ratifying other ILO conventions classified as “up to date.”

While this wording omits a specific list of fundamental rights, thereby excluding an explicit mention of forced labor, it is nevertheless covered under the general reference to ILO principles, based on the panel’s interpretation.

This wording closely mirrors the clause in the EU/South Korea treaty that the panel interpreted, suggesting a similar interpretation, especially given the use of the stronger term “shall” at two points. The panel had already determined that the term “committed” (referring to the effective implementation of ratified ILO Conventions) was legally binding.

As with the EU/South Korea FTA, the weaker stance on ratifying ILO Conventions (in this case, two concerning forced labor) might be offset by the stronger language on domestically implementing ILO principles. However, this is caveated by the panel’s suggestion that principles of freedom of association might be easier to define than other ILO principles, potentially hindering the effective addressing of forced labor. The adequacy of this approach will likely be a point of contention in the near future.

Lastly, the dispute settlement system largely mirrors that of the EU/South Korea FTA, though parties merely “discuss measures” following a panel ruling.

Application to the EU/UK treaty

Comparing the EU/S Korea FTA with the EU/UK deal (Chapter 8 on “level playing field” rules), the latter includes more recent international measures, but its references to integrating sustainable development are briefer. Conversely, the EU/UK treaty emphasizes transparency more, and its wording regarding ILO Conventions is slightly different, combining the promotion and effective implementation of such conventions: “each Party commits to respecting, promoting, and effectively implementing the internationally recognized core labor standards as defined in the fundamental ILO Conventions.”

The EU/UK treaty also includes commitments to implement relevant parts of the Council of Europe Social Charter, promote the ILO Decent Work Agenda, protect social dialogue, and cooperate on “trade-related” labor issues in multilateral fora. Additionally, it outlines a more extensive list of environmental obligations compared to the EU/South Korea FTA.

Crucially, the EU/UK treaty lacks a general clause limiting the scope to “trade-related” matters, using such wording only in a few provisions within Chapter 8. It also omits rules against harmonization or protectionism. Consequently, the jurisdictional objections raised by South Korea wouldn’t apply, and this panel report might serve as a precedent. The panel’s findings regarding the legal weight of terms like “will” and “commitment” could also be relevant.

However, both the UK/EU and UK/S Korea treaties share a crucial similarity: both subject relevant provisions to a limited form of dispute settlement, consisting of consultation followed by expert panels, without the possibility of trade remedies. The EU/UK treaty is even less stringent than the EU/Korea treaty’s “best efforts” clause, stating that a responding party is not obligated to follow the panel’s recommendations.

Conversely, provisions on upholding domestic legal standards (similar to the US/Guatemala case), are addressed in separate chapters within the EU/UK treaty, allowing for trade retaliation.

The EU/UK treaty states:

A Party shall not weaken or reduce its labor and social levels of protection below the levels in place at the end of the transition period in a manner affecting trade or investment between the Parties, including by failing to effectively enforce its laws and standards.

(An identical provision exists for environmental law).

The EU/S Korea treaty states:

1. A Party shall not fail to effectively enforce its environmental and labor laws, through a sustained or recurring course of action or inaction, in a manner affecting trade or investment between the Parties.

2. A Party shall not weaken or reduce the environmental or labor protections afforded in its laws to encourage trade or investment, by waiving or otherwise derogating from, or offering to waive or otherwise derogate from, its laws, regulations, or standards, in a manner affecting trade or investment between the Parties.

The EU/S Korea treaty outlines two rules (non-enforcement and non-regression), which are merged in the EU/UK treaty. In the former, non-enforcement is subject to two thresholds: a demonstrable effect on trade or investment and a “sustained or recurring course of action or inaction.” Non-regression is also subject to the “manner affecting trade or investment” test and the requirement that reduced standards are a result of waiving or derogating from laws to encourage trade or investment.

While the EU/UK treaty also includes the “manner affecting trade or investment” threshold, it omits the requirement for non-enforcement to be a “sustained or recurring course of action or inaction.” It also doesn’t require a reduction in standards to be a result of waiving or derogating from laws. Any reduction will suffice, though unlike the EU/S Korea treaty, the time period for judging the reduction is fixed: the end of the transition period. This suggests no room for dynamic interpretation; a reduction in standards in 2025 from a level legislated in 2022 wouldn’t fall under this clause unless it also falls below the level at the end of 2020.

However, such a scenario might fall under the EU/UK treaty’s “rebalancing” clause, which addresses future developments and is subject to potential trade retaliation. This clause is triggered when “material impacts on trade or investment between the Parties are arising as a result of significant divergences between the Parties” regarding labor, environment, or subsidy laws.

Finally, drawing analogies between the EU/S Korea panel’s interpretation of the obligation to move towards ratifying ILO treaties and the provision in the withdrawal agreement regarding the negotiation of a future relationship treaty is interesting. The relevant text from the withdrawal agreement states:

The Union and the United Kingdom shall use their best endeavors, in good faith and in full respect of their respective legal orders, to take the necessary steps to negotiate expeditiously the agreements governing their future relationship referred to in the Political Declaration of 17 October 2019 and to conduct the relevant procedures for the ratification or conclusion of those agreements, with a view to ensuring that those agreements apply, to the extent possible, as from the end of the transition period.

While the wording differs, it’s important to remember that the panel identified an obligation of effort, not result, which was not particularly strict. This makes the panel report unhelpful for those claiming the EU violated the clause by not readily agreeing with the UK’s negotiation position.

Barnard & Peers: chapter 9; chapter 24; chapter 27; chapter 20; chapter 22