Sunset clause constitutes a critical lever to bring a partner to negotiating table for rebalancing through mid-course corrections

In this jolly season one could easily recall a staple American Christmas comedy trilogy where the protagonist is subject to a legal technicality known as “The Santa Clause” (which is also the film’s title) and has to accept all of Santa’s duties and responsibilities therein. By the time the third sequel was made, the producers had appended the title “the Escape clause”, which begets the question: should agreements have a shelf life?

More recently, one can recall the furor created by the sunset clause in the recent US-Mexico-Canada Free Trade Agreement or USMCA (successor to the expired NAFTA). The sunset clause provision states that the agreement shall terminate 16 years after it enters into force unless certain conditions are met. The condition starts with a “joint review” of the agreement after six years. At this review, if the three governments express their desire to continue the agreement, the term gets further extended for 16 years from the time of this review.

After another six years have elapsed from the time of the first review, there will be another review and the process will keep getting repeated with extensions for next 16 years at each review.

Critics argue that while there is nothing wrong with updating agreements to keep up with changes in the economy and to fix flaws that have been discovered, but such a provision of a sunset clause takes “review” of the agreement to a whole new level.

Let us take a step back here and see what has historically been the shelf life of trade agreements. We know that it was not until the 19th century that the idea of free trade was seeded. The World’s first free trade agreement, the Cobden-Chevalier Treaty, was put in place in 1860 between Britain and France, which set off a number of similar treaties in Europe. This “golden age of free trade” in Europe, however, lasted only until the 1880s, whereafter, the rise of protectionism in Germany, the United States and elsewhere made the treaties irrelevant.

In fact, the evolution and demise of trade agreements find roots in the series of flip-flops between liberalisation and protectionism in the trade policies of the developed world. However, post second world war, with the formation of GATT, the larger objective within the democratic west became to pursue a more ambitious and permanent lowering of duties across board and to diminish a country’s ability to pull back given concessions.

Even so, today the idea of “winners and losers” in trade liberalization following an FTA, is increasingly influencing domestic politics even in the west. Many criticize what they allege to be a “democratic deficit of trade agreements” – limited as they are in their ability to be amended in accordance with the long-term changes in the ecosystem.

Adding to the woes of the developing world is the fact that the developed countries, who have a penchant for compelling their trade partners to maximise the tariff concessions, then use non-tariff means to undermine those concessions. This often acts as a disincentive for developing countries to pursue ambitious FTAs.

Though Article 62 of the Vienna Convention on the Law of Treaties provides for a unilateral right to terminate or suspend a treaty in case of a fundamental change of circumstances, it sets a rather high bar to clear for termination of FTAs.

The question arises as to how do we recalibrate signed FTAs and successfully initiate measures to rebalance the commitments that have been made to trade partners.

A sunset clause which has an ‘Opt-in’ option for its continuation spurs the partners to take affirmative action to recalibrate and is perhaps more effective than a sunset clause with an ‘Opt-out’ option where the default option is to continue with the FTA.

The argument being that the entrenchment effect of not having this ‘Opt-in’ provision diminishes the incentive to go for a mid-course correction, especially if one party is reluctant to come to the negotiating table - fearing that they may have to let go of an undue advantage. Why would the gainer come to the negotiating table to cede an advantage – unless compelled to. A case in point being the India-Japan CEPA which is long overdue its mid-term review.

Though a conventional liberalist narrative voices deep concerns on using sunset clauses to regulate temporary and transitory issues, yet in the long run the sunset clause constitutes a critical and underappreciated lever to bring a partner to the negotiating table for rebalancing through mid-course corrections, especially if the continuation in-force hinges on it.

On a lighter note, a periodic reaffirmation of commitments and rebalancing is always a good idea for any relationship—trade or otherwise.

(The author is a senior retired official from the Department of Commerce)