Half a Loaf – Maybe?

Source: Canada US
Link: Half a Loaf – Maybe?

Originally published in the Journal of Commerce in April 2019

Falling very much into the – you win some and you maybe lose some – a couple of noteworthy decisions have been published which may have long-term implications for the current Administration’s trade policies.

The first was in the decision in American Institute for International Steel, Inc. v. U.S., Slip Op. 19-137 (March 25, 2019). In that case, the President’s power to impose tariffs on steel (and aluminum) under Section 232 (19 U.S.C. 1862) was challenged on constitutional grounds. The thrust of the challenge was that too much power had been delegated to the President since he has unfettered discretion to decide whether or not to invoke national security and, having done so, then has unfettered discretion to determine the appropriate remedy. The three judge panel decided Congress delegated that authority and so, unless claimants are able to clearly show the President’s actions are beyond the granted statutory authority, the President is free to exercise his judgment in whatever way he chooses.

The second decision came out of the World Trade Organization’s Dispute Settlement Body, WT/DS512/R (April 5, 2019).  For the first time in the history of the WTO, a decision has been rendered in the context of a Member imposing trade restrictions based on national security considerations.  At the same time, India and Pakistan; and Qatar and the UAE, Saudi Arabia and Bahrain, along with the U.S. have WTO complaints pending which revolve around national security claims.

The recent decision concerned claims filed by the Ukraine that Russia had violated its WTO obligations by imposing severe limitations on the ability of Ukrainian people and cargo to freely transit the Ukraine-Russia border. The historical backdrop was the change in leadership which led to the decision by Ukraine in 2014 to join the European Union and the retaliatory steps taken by Russia in response. Russia took much the same attitude as President Trump’s team does – determinations about national security are beyond the scope of the WTO’s jurisdiction to consider.

The Russian actions under challenge were

a) the 2016 Belarus Transit Requirements, because they made distinctions based on the place of departure (Ukraine), destination (Kazakhstan and the Kyrgyz Republic) and entry (Belarus, where entry is exclusively permitted) of the traffic in transit;

b) the 2016 Transit Bans on Non-Zero Duty and Resolution No. 778 Goods, which made distinctions based on the place of departure (Ukraine), destination (Kazakhstan and the Kyrgyz Republic), origin (countries listed, as amended to include Ukraine) and entry (Belarus, where entry is exclusively permitted) of the traffic in transit; and

c) the 2014 Belarus-Russia Border Bans on Transit of Resolution No. 778 Goods, and the distinctions it made based on the place of entry (certain countries as listed from which entry is exclusively permitted) and origin (the countries listed, as amended to include Ukraine) of the traffic in transit.

In defending itself, Russia took the position there was an emergency in international relations that arose in 2014, evolved between 2014 and 2018, and continued to exist. As such, that emergency presented threats to Russia’s essential security interests and argued both the determination of a Member’s essential security interests and of whether any action is necessary for the protection of that Member’s essential security interests are at the sole discretion of that Member.

Ukraine argued these were disguised restrictions, meaning that Russia, by merely referring to an emergency in international relations that occurred in 2014, failed to discharge its burden to show the legal and factual elements of a defense, i.e., that there existed a serious disruption in international relations constituting an emergency akin to war which resulted in a genuine and sufficiently serious threat to its essential security interests, which, in turn, would justify each and every measure at issue as being necessary to protect those interests.

Third parties were given the opportunity for limited participation. The U.S. was one of those third parties and stated the Dispute Settlement Body Panel (Panel) lacked authority to make any decision regarding invocation of national security as the grounds for action by any Member. The U.S. subsequently clarified the issue is non-justiciable, meaning each Member makes its own decision which is not subject to challenge or review by the WTO.

The WTO article being interpreted/challenged was Article XXI which deals with “Security Exceptions” and states:

Nothing in this Agreement shall be construed

“(a)  to require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or

(b)  to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests
(i)   relating to fissionable materials or the materials from which they are derived;

(ii)  relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;

(iii)   taken in time of war or other emergency in international relations; or

(c)  to prevent any contracting party from taking any action in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.”

In interpreting this provision, the Panel found:

“An emergency in international relations would, therefore, appear to refer generally to a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state. Such situations give rise to particular types of interests for the Member in question, i.e. defence or military interests, or maintenance of law and public order interests.

Therefore, as the existence of an emergency in international relations is an objective state of affairs, the determination of whether the action was “taken in time of” an “emergency in international relations” under subparagraph (iii) of Article XXI(b) is that of an objective fact, subject to objective determination.

…   for action to fall within the scope of Article XXI(b), it must objectively be found to meet the requirements in one of the enumerated subparagraphs of that provision. [footnotes omitted]”

The  Panel then held in Russia’s favor stating it had:

“…identified the situation that it considers to be an emergency in international relations by reference to the following factors: (a) the time-period in which it arose and continues to exist, (b) that the situation involves Ukraine, (c) that it affects the security of Russia’s border with Ukraine in various ways, (d) that it has resulted in other countries imposing sanctions against Russia, and (e) that the situation in question is publicly known. The Panel regards this as sufficient, in the particular circumstances of this dispute, to clearly identify the situation to which Russia is referring, and which it argues is an emergency in international relations.

It is therefore incumbent on the invoking Member to articulate the essential security interests said to arise from the emergency in international relations sufficiently enough to demonstrate their veracity.

What qualifies as a sufficient level of articulation will depend on the emergency in international relations at issue. In particular, the Panel considers that the less characteristic is the “emergency in international relations” invoked by the Member, i.e. the further it is removed from armed conflict, or a situation of breakdown of law and public order (whether in the invoking Member or in its immediate surroundings), the less obvious are the defence or military interests, or maintenance of law and public order interests, that can be generally expected to arise. In such cases, a Member would need to articulate its essential security interests with greater specificity than would be required when the emergency in international relations involved, for example, armed conflict.”

It seems obvious the steel and aluminum tariffs were not imposed in response to any actual or threatened armed conflict.  At the same time, it is worth keeping in mind the language in 19 U.S.C. 1862(d):

“… the Secretary [of Commerce] and the President shall further recognize the close relation of the economic welfare of the Nation to our national security, and shall take into consideration the impact of foreign competition on the economic welfare of individual domestic industries; and any substantial unemployment, decrease in revenues of government, loss of skills or investment, or other serious effects resulting from the displacement of any domestic products by excessive imports shall be considered, without excluding other factors, in determining whether such weakening of our internal economy may impair the national security.”

“So far, a lot of these cases do involve real conflicts — Ukraine and Russia; Qatar and these other countries; India and Pakistan,” Simon Lester, the associate director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies in Washington, said in an interview [with Bloomberg reporters Bryce Baschuk and Lyubox Pronina published March 28, 2019.]. “The U.S. metal tariffs “seem a little more far-fetched.”

It does seem likely the WTO challenges filed by other countries to the imposition by the U.S. of the 232 tariffs will not be resolved by consultations. Will the Trump Administration be able to convince a WTO Panel of the correctness of its position? Will any adverse decision be upheld on appeal?  Stay tuned for further episodes of “As the Trade World Turns!”

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