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US-China Trade War: Understanding the Scope of Article XXI

October 6, 2018

[Priyanka Sunjay is a student at National Law University, Jodhpur.]

 

Presidential Proclamations and Section 232

 

On March 8, 2018, President Trump gave his assent to impose duties of 25% on steel and 10% on aluminum imports in two Presidential Proclamations (Presidential Proclamations).[1] The legislative provision which gives him the authority to do so is section 232 of the Trade Expansions Act, 1962 that permits the executive to limit imports of products for national security purposes.[2] Under this statute, citizens can petition the government to apply import restraints and the government must respond within one year by restricting imports or by providing reasons to not do so. The decision is based on investigations—initiated by the Secretary of Commerce—that determine the effects of imported products on the national security of US.[3] To determine whether the import restrictions are justified, the Secretary and the President should consider factors involving national defense requirements as well as examine the impact of imported articles on economic welfare of the internal economy and domestic industries; the provision also emphasizes on the close relation of economic welfare to national security.[4] 

 

Thus, section 232 is broadly worded and gives the power to the President to pay heed to a wide variety of factors. The President Proclamations justified the tariffs on the ground that the imported articles threaten the “closure of the domestic steel production facilities” and reduce their ability “to meet national security production requirements in a national emergency.” Initially, Canada and Mexico were exempted from the tariffs; subsequently, the US went on to grant temporary exemptions to the European Union, South Korea, Australia, Argentina, and Brazil.

 

Article XXI: Its Scope, Nature and Reviewability

 

Article XXI provides for general exception to all GATT obligations in the following manner: (a) members are excluded from disclosure of information which it considers to be contrary to its essential security interests; (b) any action that a member state takes which it considers necessary for the protection of its essential security measures relating to regulation of fissionable materials, regulation of traffic and in arms and any action in pursuance of UN Charter obligations relating to maintenance of international peace and security is excluded;[5] or (c) it contains a vaguely worded clause that allows for an action taken in time of war or other emergency in international relations.[6] Few questions that arise with respect to Article XXI are: How near or impending should the threat be? Is there any threshold of necessity under Article XXI? To help me with these questions, I searched for cases and previous instances wherein this exception had been used.

 

Previous Invocation of Article XXI

 

1. Article XXI was invoked for the first time by the US to justify its sanction against Czechoslovakia. Czechoslovakia challenged the invocation of the provision in a broad way by the US. Although the challenge was rejected on substantive grounds, it is significant that the US did not challenge outside review of the invocation.[7]

2. However, there was a shift from this position in a case where the application of Article XXI as a justification for the US’ embargo on all transactions relating to imports from Nicaragua and exports to Nicaragua was challenged by Nicaragua. It was argued by the US that the language is self-judging. The GATT panel refused to exercise jurisdiction and asserted that it had no authority to examine the correctness of invocation of Article XXI.[8] 

3. A similar line of argument was taken by the US in its submissions in the Russia—Traffic in Transit case, where it argued that a Member has the “discretion and responsibility” to decide “what is required to protect the security of its nation and citizens."

4. Likewise, Article XXI was resorted to by Sweden in 1975 when it imposed import restrictions on certain footwear by way of global import quota system; Sweden justified this imposition by stating that there was a decrease in its domestic production, and argued that securing a minimum production capacity in “essential products” is “necessary” in case of war or “other emergency in international relations.” However, the invocation of Article XXI raised eyebrows of many representations; ultimately, Sweden terminated its import restrictions for plastic and leather shoes.

5. Article XXI was also invoked by the US to justify the presidential proclamation issued in 1962 which imposed embargo on trade with Cuba.

6. The United Arab Republic refused to discuss the boycott against Israel and firms that have relations with Israel by the Arab League on the ground that it is “political” in nature and is related to the state of war that prevailed in the area. This was noted in the 1970 Working Party Report.

7. Many countries such as Canada, US, Australia, Austria, Japan imposed economic sanctions or withdrew preferential treatments that were granted to Yugoslavia. This was after the EEC adopted trade measures against Yugoslavia based on Article XXI on the ground that it is to protect its essential security interests. Yugoslavia challenged that the measure taken by the EEC does not come within the ambit of Article XXI and asked for establishment of a panel. However, the same was not done due to technical constraints. In the 47th session in 1991, India stated that it does not favor the “use of trade measures for non-economic reasons”, and emphasized that the United Nations is the correct forum for the same.

8. Further, it was also used by Ghana to justify its boycott of Portuguese goods, and by the European Economic Community, Canada, and Australia against imports from Argentina. In both the cases, the countries invoked Article XXI due to political reasons as well as argued that the measures were taken on exercise of their inherent rights and did not require any justification. On Argentina’s request for interpretation, paragraph 7(iii) of the Ministerial Declaration of 1982 was added, which calls for countries to “abstain from taking restrictive trade measures, for reasons of a non-economic character, not consistent with the General Agreement.”

9. Further, way back in the Geneva Session of the Preparatory Committee, the meaning of “essential security interests” was clarified to not include actions taken by countries with a commercial purpose under the guise of security. Strikingly, the European Union criticized the imposition of tariffs by Mr. Trump in a statement issued by the European Council that noted that “these measures cannot be justified on the grounds of national security.”

10. Most recently, Qatar requested consultations with UAE, Bahrain, and Saudi Arabia post imposition of trade embargo against Qatar by these countries. Subsequently, Qatar asked for establishment of panels. While Qatar has argued that the measures are against GATT, GATS, and TRIPS, UAE has argued that it is in interest of its national security as Qatar funds terrorist organizations. Once again, the contention is with respect to the self-judging character/non-reviewability of Article XXI.

 

China has requested for consultations with US and asserted that the measures are, inter alia, are inconsistent with the Agreement of Safeguards on the ground that there was a failure to provide reasoned and adequate explanation for imposition of tariffs and non-compliance with the procedural requirements. Additionally, it has argued that selective application of the measure is inconsistent with the obligation under Article I:1 of GATT. By doing so, China has negated the claim that it falls under Article XXI. It also provides an advantage to China because under Article 8.1 of the Safeguards Agreement, an affected country can request for consultations and the parties may agree for compensation for adverse effects of the measure.[9] On failure to reach an agreement within 30 days of consultations, the exporting members are entitled to suspend, on 30 days written notice, "the application of substantially equivalent concessions or other obligations under GATT 1994, to the trade of the Member applying the safeguard measure.”[10] The EU, India, Russia, and Thailand have requested to join the consultations.

 

Conclusion

 

Even if we assume that the nature of Article XXI is self-judging, the exercise of discretion is still subject to good faith as held by the ICJ in Djibouti v. France. However, Simon Lester has argued that the US can justify that its measure was taken in good faith since section 232 contains an elaborate procedure. The invocation of Article XXI for non-economic reasons is against the intention of the drafters as well as the Ministerial Declaration of 1982. The measures have prompted responses by nations; the European Union has launched its safeguard investigation and is contemplating action against the US, while China has imposed heavy duties on a list of US products. Further, the China-US relations have worsened with a parallel dispute regarding US’ allegations on China’s theft of trade secrets and forced technology transfers. The author feels that the fiscal measures could be a better alternative to achieve economic welfare as opposed to tariffs.  The highly contested views about the scope of Article XXI are required to be settled by a panel body to bring in clarity and to prevent use of Article XXI for any restrictive measure. 

 

[1] Presidential Proclamation on Adjusting Imports of Steel into the United States, Issued on March 8, 2018, https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-steel-united-states/; Presidential Proclamation on Adjusting Imports of Aluminum into the United States, Issued on March 8, 2018, https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/ [hereinafter Presidential Proclamations].

[2] Trade Expansion Act of 1962 (19 U.S.C. §1862) [hereinafter TEA, 1962].

[3] Section 232(b), TEA, 1962.

[4] Section 232(d), TEA, 1962.

[5] General Agreement on Tariffs and Trade 1994, Apr. 15, 1994.

[6] Article XXI(b)(iii), GATT, 1994.

[7] John H. Jackson, World Trading System (1989).

[8] Panel Report, United States - Trade Measures affecting Nicaragua, 1L/6053, 13 October 1986.

[9] Agreement on Safeguards, 1869 U.NT.S. 154 [hereinafter Safeguards Agreement].

[10] Article 8.1, Safeguards Agreement.

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