Founders Broadsheet trade correspondent L.C. writes:
In a decision with major implications for the Trump administration’s Section 232 national security tariffs on aluminum and steel, a World Trade Organization (WTO) dispute settlement panel ruled for Russia against the Ukraine on April 5th. The case was brought against Russia for restricting the transit through Russia of Ukrainian goods headed for Central Asia.
This is the first case involving the WTO’s Article 21 — the national security exception — to ever reach the stage of a panel ruling. The parties have 60 days to file an appeal, so the case may go to the Appellate Body before a final determination is made.
In 2016 Kiev complained to the WTO that restrictions on the transit of Ukrainian goods to Kazakhstan and Kyrgyzstan were discriminatory and were injuring its exports to Central Asia. Russia said the restrictions were needed for its security WTO-permissible because it is in a military confrontation with the Ukraine.
The panel largely sided with Moscow but not on its claim – which the US strongly supported — that the WTO doesn’t have the authority to pursue a case once Article 21 has been invoked by a member nation.
Implications
There are two important dimensions to the ruling. First, the panel decided that it is appropriate for the WTO to accept and rule on cases where a WTO member justifies trade barriers through Article 21. Second, it found in favor of a country invoking Article 21 but only because it met criteria specified under Article 21, not simply because it invoked the article.
The panel made clear that members are expected to act “in good faith” and only use Article 21 to protect “essential security interests,” not simply to escape WTO obligations. Indeed, the founders of GATT, the WTO’s predecessor, made clear their assumption that the exception would not be abused. They recognized that abuse would quickly undermine the rule-based nature of the trading system.
Under Article 21 a WTO member may take “any action which it considers necessary for the protection of its essential security interests.” Such action may breach basic WTO rules and principles. Invoking Article 21 is the only way a country may do so. The article states, however, that actions taken under Article 21 should relate “to fissionable materials” or “traffic in arms… and implements of war” or be “carried on… for the purpose of supplying a military establishment,” or “taken in time of war or other emergency in international relations.” These conditions were established in the Russia-Ukraine case – specifically an emergency in international relations – but they are a strict standard to meet.
The US argued the view that each country can decide for itself whether to use the article to justify trade restrictions that are otherwise WTO-illegal, without having to meet any criteria for showing a real security threat and without the trade body having any oversight.
This position, which was also part of Russia’s defense, was bluntly rejected by the panel. This suggests that the WTO will soon take up cases brought against the US steel and aluminum tariffs.
Two other cases
Other Article 21 cases are pending between
- Qatar and the UAE,
- Indian and Pakistan.
Both the Qatar-UAE and India-Pakistan disputes involve enemy countries that appear close to war and have real national security concerns. This is very different situation from the US imposition of Section 232 tariffs on its close allies.
The WTO panel decision has other implications. It could – though this is unlikely – cause the Administration to reconsider forging ahead with Section 232 restrictions on automotive trade, since the targeted countries would surely complain immediately to the WTO and set the US up for a defeat there. The ruling could also spur Senate Finance Committee Chairman Chuck Grassley (R-IA) to quickly move forward his bill curtailing presidential action under Section 232.
The ruling will likely intensify President Trump’s hostility to the WTO and could incite him to undertake more unilateral action in defiance of WTO rules. The Trump administration insists that the WTO can’t adjudicate a country’s claim that it is acting to protect national security because that would infringe national sovereignty.
But the President and other officials, including Commerce Secretary Wilbur Ross, have on several occasions admitted that the president is using Section 232 tariffs for purposes other than protecting national security – for example, to protect against dumping and as leverage in trade talks. These statements will undercut a US defense of the tariffs at the WTO.
President Trump’s charge that an adverse Section 232 ruling by the WTO would infringe on US sovereignty is not true. Countries are free to ignore WTO rulings, but the cost for doing so is that it enables other WTO members to retaliate without themselves violating the rules.
President Trump already has his hands full with quite a few crises:
- On the southern border;
- Venezuela;
- Libya;
- North Korea;
- Stalled trade pacts with Japan, the European Union, Mexico and Canada, and China; and
- Federal Reserve policy.
He doesn’t need to add a world economic crisis precipitated by the break-up of the WTO.
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