What is illicit trade?
Illicit trade is an umbrella term that is used to describe a range of illegal activities from human trafficking, the trade in endangered species, illegal logging, fake medicines, illegal trade in arms and the production and sale of counterfeited and pirated goods. While the exact magnitude is difficult to assess, it is considered that billions of dollars are generated through this shadow economy.
Despite the significant economic consequences, the response of IEL to illicit trade is minimal. This state of affairs is not altogether surprising when considering that the very objective of IEL is to increase the flow of trade and investment. Therefore the natural conclusion is that measures designed to combat illicit trade can potentially be trade distortive or impede foreign investment.
The objective of this guide is to evaluate the current state of affairs in respect of the relationship between IEL and illicit trade, uncover any synergies between them and finally, identify opportunities where IEL can be used to combat illicit trade. In conducting the analysis, the authors employed the commonly cited definition of illicit trade found in the WHO Framework Convention on Tobacco Control. The utility in using this definition primarily lies in its ability to capture the broad range of activities that are considered to fall under purview of illicit trade. In addition, it takes into consideration that the ‘illegality’ of the trade may arise at any stage of the supply chain. For example, fake medicines are illegal at the stage of production, whereas cigarettes may be legitimately produced, but smuggled into another country. Finally, the definition hints at one key obstacle in the fight against illicit trade – the inconsistent determination on what activity is ‘illegal’.
Illicit Trade and the International Trade Regime
The rule-based World Trade Organisation (‘WTO’) system presents a few entry points for addressing illicit trade. Firstly, the Agreement on Trade Related Aspects of Intellectual Property Rights (‘TRIPS’) includes some substantive obligations on member states in respect of minimum standards of protection of intellectual property rights (‘IPRs’). These standards have been widely adopted by most WTO Members through their national legislations. China too has undertaken a complete overhaul of its copyright, patent, and trademark regimes since its accession to the WTO in 2001. However, the enforcement obligations under the TRIPS Agreement weakens the effectiveness of the regime as it only attempts to establish general standards to be implemented according to the framework determined by each Member. Moreover, it recognises the existence of different standards of enforcement of IPRs among member states.
The memorandum also looked at the possibility of addressing illicit trade through a cause of action under the WTO dispute settlement system based on a situation complaint. In essence, the analysis indicates that such an action would be useful in achieving a political outcome and raising awareness of illicit trade issues, rather than a legal solution.
As measures aimed at addressing illicit trade may have the effect of distorting trade and conflicting with WTO rules, the authors also looked at whether the WTO rules provided sufficient latitude to allow WTO Members to introduce such measures. Essentially, under the rules of the General Agreement on Tariffs and Trade 1994 (‘GATT 1994’), so long as such measures are not of a quantitative nature, do not discriminate imports/exports as against domestic products, nor between imports/exports of different origins, these measures are generally accepted under WTO disciplines. Where measures do not meet these requirements, they may still be ‘saved’ by relying on general exceptions provided under GATT Article XX. However, in order to increase the chance of a measure being justified, policy makers should align the primary objective of the measure to the justifications provided under Article XX(b), (d) and (g), rather than developing a measure solely on the basis of fighting illicit-trade related issues.
Potential recourse under international investment law was also examined where a foreign investor suffers damage as a result of illicit trade activities in a host country. The analysis was undertaken by attempting to formulate a claim on the violation of common substantive obligations found in investment treaties. In making such a claim, the investor will have to demonstrate that it was the failure of the host state to address the illicit activity that has led to the alleged damage. While in theory an investor may have such a cause of action under IIL, their prospects of success would be limited given the difficulty in attributing, or establishing a causal link to the damage suffered by it, to the acts or omissions of the host state.
Finally, the last section of this memorandum suggests recommendations on how IEL can be developed to better address illicit trade.