The summer 2023 capped off half a decade of a World Trade Organization wrangling with the rule-book’s national security exception. The process has landed the global trading order in a very uncomfortable place. It’s hard to see a way out unless the system accepts Washington’s zero-sum terms.
India and the United States settled their bilateral legal trade disputes last July and this month a Geneva panel ruled that China’s tariffs enacted in retaliation to the United States Section 232 steel and aluminium duties are illegal. On the face of it, these developments are good news for trade multilateralists and for those who want peace, trade and pragmatism to prevail – but they aren’t.
The India-US settlement entrenches Washington’s Trumpian handbook, its single-minded focus on hedging against China and its embrace of industrial policy. The US dropped its cases related to New Delhi’s subsidies for the manufacture of solar cells and over tax breaks on certain exports. India dropped its cases against US steel countervailing measures.
The US did what it agreed with other countries – including the EU – on its Trump-era steel and aluminium tariffs: grant India tariff rate quotas on the metals in return for New Delhi dropping its own retaliatory tariffs on products such as lentils, almonds and walnuts taken in response to the Section 232 tariffs.
Accordingly, the Indian WTO case against the Section 232 tariffs was dropped, and so was the US own panel dispute against India’s retaliatory measures. India is now allowed to engage in its own version of the Trumpian handbook, to pursue a single-minded focus on hedging against China and to embrace industrial policy in its own liking – as long as there’s Washington’s blessing and involvement.
Last January WTO panelists ruled the Section 232 tariffs illegal. There were four broadly similar rulings in near-identical cases brought by China, Norway, Switzerland and Turkey.
The panels said that there was no “emergency in international relations” warranting those steel tariffs. Such an emergency can be seen as a legitimate justification for a country to unilaterally raise trade barriers and discriminate against a given country according to Article XXI of the General Agreement on Tariffs and Trade, which deals with security exceptions.
In the meantime the US continues to insist on its view that no WTO panel has the right to judge on national security matters at all. It appealed the case into the void of an absent appellate body, a body which the US itself shot down in the Trump era and never resuscitated. These Section 232 cases are thus in limbo.
No right to unilaterally retaliate against ‘national security’ trade measures
The January rulings follow on two other ones on the national security exception in the WTO: a 2019 report on Russia’s restrictions on transit of Ukrainian goods following its invasion of Crimea and occupation of the Donbas and the more recent case in relation to US labelling of Hong Kong’s products following China’s crackdown on civil rights on the putatively independent island.
The rulings reveal that WTO panelists will give a lot of leeway to sovereign countries to take discriminatory action on the basis of national security considerations, but that they will still seek to judge whether there are objective grounds to do so.
In the steel and aluminium and the Hong Kong cases the panelists did just that. They found what most observers agree with: there were no grounds for taking trade restrictive measures for national security reasons.
But this is a world of sovereign states and great powers that won’t let themselves be told what is in their national security interest by some legal experts. As a result, “the panels’ rulings are (…) likely to increase US intransigence towards the WTO dispute settlement system and the organisation itself”, notes Melbourne University’s Tania Voon.
This month a WTO dispute panel also found what most persons familiar with the basic principles of the WTO-centric international trade rule-book already knew: the retaliatory tariffs enacted by countries affected by the US Section 232 tariffs are not legal either.
Those tariffs were taken in a coordinated way among a range of countries which also coordinated the disputes they took to Geneva. The US counter-sued these countries. Some of these disputes were settled outside the WTO. But not the one with China.
In its defence against the US, Beijing used a (originally EU-) fig-leaf argument that the metals tariffs were in fact disguised safeguards and that retaliation was possible on the basis of rules enshrined in the WTO’s agreement on safeguards.
That notion was quickly rejected. The panelists view was that the US Section 232s “were designed and expected to operate to address the threat to national security that the United States had determined to arise from rising levels of aluminium and steel imports”. As a result China finds itself in violation of the foundational GATT principles, so the panel.
This report is a stark reminder that there is, in the WTO system, simply no way to legally retaliate against a country’s trade measures without going through a proper dispute settlement proceeding. The latter would be lengthy – assuming it were available. But it is not, given the appellate body’s demise.
Perverse incentives
As a result we are left with unenforceable WTO rulings on issues of foundational significance for its members.
The situation has in fact become truly perverse.
An unintended consequence of the recent WTO rulings on national security is that “they provide all the wrong incentives—blessing a more aggressive act when invoking the national security exception” as in the Russia-Ukraine ruling “and giving a free pass to egregious conduct”, wrote Warren Maruyama and Alan Wolff in a paper for the Washington-based Peterson Institute for International Economics back in May.
In this brave new world of trade wars, amplified by their embrace by the global superpower United States – where a real war also doesn’t seem a very remote possibility anymore – it is time to set the alarm bells ringing.
Maruyama and Wolff, who sought to give their input into the ongoing WTO reform negotiation process with their PIIE paper offered an interesting solution to resolve the conundrum.
“In the emerging area of great power competition, the United States is unlikely to accept a return to fully effective WTO dispute settlement absent a compromise that finds determinations of national security nonjusticiable”, the two note.
In their paper, the authors offer “a compromise” solution: “[T]here would be no adjudication of whether a measure was justified under the WTO’s national security exception, but those WTO members adversely affected would have an immediate right to rebalance trade concessions themselves by imposing retaliatory trade measures against the WTO member invoking the exception.”
But isn’t this legalising trade wars altogether and turning the whole system on its head?
In any case, the WTO membership should be prepared for a US not being ready to reform anything in any meaningful way.
Indeed in the current configuration, the United States finds itself in the best of possible worlds. It can simply ignore rulings made against it by using the national security exception – potentially compensating some selected friends during potential future ‘non violation’ complaints in Geneva – or appealing a case into the void. But it can still continue to sue those who disagree or retaliate, especially China. So why change?
