WAR IN OUR TIMES: THE END OF THE TRADING SYSTEM AS WE KNOW IT?

Meera Manoj, Gujarat National Law University, India

Introduction

A new kind of war has captured the world’s imagination of late: a war of global tariffs.

The “trade war”, as it has been loosely termed, began with the United States’ (“US”) imposition of additional tariffs of 25% on steel and 10% on aluminum imports last March.[1] The measure was imposed as per an investigation conducted under Section 232 of the Trade Expansion Act of 1962.[2] The US concluded that the continued import of these goods constituted a threat to its national security by weakening the internal economy, leaving it “almost totally reliant on foreign producers in case of a national emergency.”[3]

In response, several World Trade Organisation (“WTO”) members such as China, the European Union (“EU”), India, Russia, Turkey, Canada and Mexico have announced retaliatory tariffs.[4] There are currently multiple WTO disputes pending against the US initiated by Switzerland, Russia, China, India, EU, Canada, Mexico and Norway.[5] The US has also initiated challenges against China, the EU, Canada, Mexico and Turkey characterizing the retaliatory tariffs imposed by them as illegal.[6]

Article XXI of GATT

The most pressing legal question that arises from these developments is the use of Article XXI of the General Agreement on Tariffs and Trade 1994 (“GATT”) as a justification by the US. Article XXI is a rarely used provision that allows for a member to derogate from its WTO obligations while taking actions “which it considers necessary for the protection of its essential security interests.” These security interests are elaborated as being related to fissionable materials, arms traffic, war and any emergency in international relations.[7] In this instance, it is questionable as to whether the “weakening of internal economy” due to foreign production of goods is merely protectionist and not a true threat to national security.

However, the US has sought to escape scrutiny on this point by reiterating that that Article XXI is a self-judging provision. In its third-party submissions in Russia – Measures Concerning Traffic in Transit, the US has stated that a Panel may simply acknowledge that a measure has been taken under Article XXI and cannot arrive at any actual finding regarding its appropriate use.[8] The rationale for the US position flows from the interpretation that the phrase “any measures which it considers” means that it is left to the sole discretion of a WTO member. In fact, this approach has been taken by some countries in the past, in the few occasions that Article XXI was ever invoked. For instance, in 1961, Ghana invoked Article XXI to justify its boycott of goods from Portugal while reiterating that it was the sole judge of its national security interests.[9]

Perhaps it is ironic that it was the US itself that guaranteed against the possibility of abuse of this provision, while itself introducing the New York Draft of the GATT. In response to concerns, the then US negotiators had assured other members that, “…[t]here must be some latitude here for security measures. It is really a question of a balance. We cannot make it too tight, because we cannot prohibit measures which are needed purely for security reasons. On the other hand, we cannot make it so broad that, under the guise of security, countries will put on measures which really have a commercial purpose.”[10] This interesting piece of negotiation history may shed some light on the true intent of Article XXI.

It is also important to note that in the past international tribunals did not consider their jurisdiction barred simply because a measure is self-judging. In Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), the International Court of Justice noted that although the impugned provision was discretionary, it was still subject to the obligation of good faith codified in Article 26 of the Vienna Convention on the Law of Treaties 1969.[11]

The EU has advanced certain key arguments along these lines. It has stated that Article XXI although an affirmative defense, does not operate as an exception to the rules of jurisdiction under the Dispute Settlement Understanding (“DSU”), 1994. If it were a non-justiciable provision, then panels could not comply with Article 11 of the DSU to make an objective assessment of the matter before it.[12] The EU has also suggested that the phrase “which it considers necessary” only qualifies the measure taken by the member state and not the circumstance in which it is taken. Simply put, while a member may be free to decide what would constitute an appropriate measure, the Panel will still have a role to determine whether the circumstances which triggered such a measure truly exist.[13] While the approach taken by the US could, if accepted by a Panel, trigger a collapse of the trading system with members free to abuse Article XXI repeatedly, the EU’s position that Panels review would constitute an “essential threat to security” will expose the Panel to allegations of judicial overreach.

Reactions to the US position

Another troubling aspect is the imposition of retaliatory tariffs by other countries. These have been justified by characterizing the US measures as safeguards allowing the suspension of substantially equivalent concessions under Article 8.2 of the Agreement on Safeguards 1994.[14] Under Article 8.3, this right of suspension cannot be exercised in the first three years that the safeguard measure is in effect unless there has been a relative and not absolute increase in imports.[15] With retaliatory tariffs being announced in almost 10,000 products it is unclear how this threshold will be met. Additionally, Article 11(1)(c) expressly prohibits countries from applying the provisions of the Agreement on Safeguards against measures that are not maintained under Article XIX of the GATT. Thus, retaliating members’ unilateral characterization of US measures as safeguards although they are being justified under Article XXI if accepted, could legitimize taking such measures even in times of genuine security threats.

Other countries affected by the US tariffs have adopted another approach, cooperating with the US and applying for exemptions. For instance, South Korea agreed to an absolute quota for 54 separate subcategories of steel to be permanently exempted from the steel tariffs.[16] Negotiation of such bilateral agreements with the US to restrict exports have prompted concerns that the world is receding into the pre-WTO age of voluntary export restraints that are prohibited under Article 11 of the Agreement on Safeguards[17]. This reaction is also very troubling: if the idea that negotiations regarding Article XXI with the US must be conducted outside the WTO is accepted[18], then it could undo the aims of non-discriminatory and equal treatment under the WTO.

In conclusion, with the stakes being so high and no immediate solution in sight, this trade war could either result in the collapse of the multilateral trading system or prompt a deep overhaul of WTO law to reform longstanding systemic issues.

 

[1] White House, ‘Presidential Proclamation on Adjusting Imports of Steel into the United States’ (White House, 8 March 2018) <https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/> White House, ‘Presidential Proclamation on Adjusting Imports of Aluminum into the United States’ (White House, 8 March 2018) < https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/> accessed 15 September 2018

[2] White House, ‘Presidential Proclamation on Adjusting Imports of Aluminum into the United States’ (White House, 8 March 2018) < https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/> accessed 15 September 2018

[3] White House, ‘Presidential Proclamation on Adjusting Imports of Aluminum into the United States’ (White House, 8 March 2018) < https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/> accessed 15 September 2018

[4] ‘Section 232 Investigations: Overview and Issues for Congress’, (EveryCRSReport, 5 July 2018) https://www.everycrsreport.com/reports/R45249.html#_Toc524526874 accessed 17 September 2018

[5] ‘Section 232 Investigations: Overview and Issues for Congress’, (EveryCRSReport, 5 July 2018) https://www.everycrsreport.com/reports/R45249.html#_Toc524526874 accessed 14 September 2018

[6] Office of the United States Trade Representative, ‘United States Challenges Five WTO Members Imposing Illegal Tariffs Against U.S. Products’ (USTR, July 2018) https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/july/united-states-challenges-five-wto accessed 16 September 2018

[7] Article XXI, General Agreement on Tariffs and Trade 1994

[8] Third Party Submission of the United States, Russia – Measures Concerning Traffic in TransitWT/DS512, (November 7, 2017), <https://ustr.gov/sites/default/files/enforcement/DS/US.3d.Pty.Sub.Re.GATT.XXI.fin.%28public%29.pdf>

[9] World Trade Organization, ‘WTO analytical index: Guide to WTO Law and Practice – Article XXI’ <//www.wto.org/english/res_e/booksp_e/gatt_ai_e/art21_e.pdf> accessed 16 September 2018.

[10] Economic and Social Council, ‘Second Session of the Preparatory Committee of the UN Conference on Trade and Development’ E/PC/T/A/PV/33 <https://docs.wto.org/gattdocs/q/UN/EPCT/APV-33.PDF> accessed 13 September 2018

[11] Certain Questions of Mutual Assistance in Criminal Matters, Djibouti v France, Judgment, ICJ GL No 136, [2008] ICJ Rep 177, ICGJ 1 (ICJ 2008) (ICJ, 4 June 2008) <https://www.icj-cij.org/en/case/136>

[12] Third Party Submission of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, (November 8, 2017), http://trade.ec.europa.eu/doclib/docs/2018/february/tradoc_156602.pdf

[13] Third Party Submission of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, (November 8, 2017), http://trade.ec.europa.eu/doclib/docs/2018/february/tradoc_156602.pdf

[14] European Commission, ‘EU to implement provisional safeguard measures on steel following US tariffs’ (EC, 6 July 2018) < http://trade.ec.europa.eu/doclib/press/index.cfm?id=1882> accessed 15 September 2018

[15] Article 11, Agreement on Safeguards 1994

[16] Executive Office of the President, ‘President Donald J. Trump Approves Section 232 Tariff Modifications’ (White House, 30 April 2018) <https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-approves-section-232-tariff-modifications/> accessed 15 September 2018

[17] Article 11, Agreement on Safeguards 1994

[18] Third Party Submission of the United States, Russia – Measures Concerning Traffic in Transit, WT/DS512, (November 7, 2017), https://ustr.gov/sites/default/files/enforcement/DS/US.3d.Pty.Sub.Re.GATT.XXI.fin.%28public%29.pdf

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