The Covid-19 Test for Preferential Trade Agreements: National Security Exceptions and Trade and Investment Restrictive Measures in Services

The Covid-19 pandemic has had unprecedented adverse effects on trade in goods and services, and foreign investments. Unilateral government measures on people’s physical movement, restrictions on the imports and exports of essential goods, and the assurance of domestic food supplies have subjected the current preferential trade rules for the governance of trade and investments to a stress test.

This paper investigates the extent of this stress test in the context of trade and investment in services. Two questions drive this work. Whether unilateral restrictive measures adopted by states during the pandemic have justification or are permitted within the architecture of regional preferential and investment agreements recently concluded. If so, whether these agreements have balanced the pursuit of legitimate public policy objectives, particularly security, and agreement effectiveness.

Addressing these questions is relevant due to the role plurilateral agreements play in the governance of trade and investment in services. Informed insights on the risks and implications of security exceptions more generally contribute to current debates regarding a pandemic treaty and its content.

This paper records that new and tighter screening rules on foreign investment and the imposition of direct and indirect taxes on digital services and services providers are the most salient restrictive measures during the pandemic. However, debates on these subject matters precede the pandemic. Thus, it is questionable that the Covid-19 emergency is their primary motivation.

Preferential trade and investment agreements provide other architectural choices such as carve-outs and reservations that extensively exempt or limit the application of substantive treaty obligations to the above restrictive measures. Therefore, governments continue to have broad policy space to adopt these types of measures. In those cases where treaty obligations such as national treatment apply to FDI screening regimes and taxation, the risks of misuse and abuse of the security exceptions remain in the current climate, particularly for the former type of restrictive measures. However, the stakes are less than anticipated at the onset and forecasted in the literature.

This paper argues the need for recalibrating security exceptions in these agreements, proposing disciplines on transparency, consultation mechanisms and notification. These disciplines will incorporate procedural ‘costs’ to use these escape clauses, safeguarding its exceptional character. Interpretative notes could also reduce the ambiguity that promotes self-serving interpretations of these treaty clauses. This paper does not address the constraints for these changes to take place. However, these constraints represent a valuable research agenda for understanding security exceptions and their prospects for recalibration.