Jun 18, 2018 07:16 AM IST | Business

‘National security’: Its use and misuse in trade policy

The ‘national security’ exception is a preserve for sovereign power which finds a place in practically all trade agreements, but has never been tested in a trade dispute. The reason is simple: while it has been invoked a few times, matters have never escalated sufficiently for it to be tested.

And now, there are four disputes (three against the US) pending at the WTO where the ‘national security exception’ has been invoked as a defence for WTO-inconsistent policies. The first pertains to a dispute initiated by Qatar against the UAE, which raises the issue of the legality of trade embargoes that have been maintained by UAE against Qatar on the reasoning that Qatar has been taking actions supporting terrorism and destabilising the region. Qatar maintains that such allegations are baseless and unjustified, and has raised a dispute that UAE’s “coercive attempts at economic isolation imposed…against Qatar... affect trade in goods, trade in services and trade-related aspects of intellectual property rights”. UAE has been maintaining that the dispute involves political and diplomatic issues pertaining to national security and cannot be decided by the WTO.

While this dispute is pending, China, India and EU have individually taken on the US at the WTO, claiming that the duties of 25% and 10% imposed by the US on imports of steel and aluminium products are inconsistent with WTO obligations. The US defence has been that the tariffs have been imposed pursuant to section 232 of its Trade Expansion Act, which allows it to take measures to safeguard “national security”, and that imports threaten domestic production of aluminium and steel, and thereby U.S.’ national security.

Meanwhile, the US Department of Commerce has started an investigation into automobile imports to determine whether they "threaten to impair the national security" of the US. Suddenly, ‘national security’- with regard to which countries have so far exercised great restraint, appears to be the panacea for all domestic incompetence.

National Security: Law and Practice

It is worth examining relevant extracts from Article XXI of GATT which deals with the national security exception:

“Nothing in this Agreement shall be construed

(a) …

(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;…”

The specific provision that the U.S. appears to be relying on is Article XXI:b(ii), and UAE is resorting to Article XXI:b(iii).

The national security exception was discussed by a GATT panel in 1986 in a dispute raised by Nicaragua against the US restrictions of products of Nicaraguan origin. While not making a ruling on this aspect, the GATT panel noted that “embargoes imposed for security reasons create uncertainty in trade relations and, as a consequence, reduce the willingness of governments to engage in open trade policies and of enterprises to make trade-related investments.” It emphasized on a careful balancing of security needs against the need for stable trade relations.

This was preceded by a situation in 1949 when Sweden imposed restrictions on footwear imports on the ground that footwear constitute “military strategic goods”. A GATT Council examined the issue and clarified that Article XXI does not accept states’ arbitrary declaration on the need to protect security interests, and concluded that the import ban on footwear was an example of abuse and misuse of the GATT security exceptions. The council also clarified that the security exception clause was to be applicable only in rare and imminent circumstances and it was the last resort for the Members to ensure its policy sphere in case of international emergency.

Reality: More Harm than Good?

Jurisprudential niceties aside, the economics behind US exercise of the national security exception has flummoxed not only critics, but in the past few weeks, even those it was supposed to benefit. The United Steelworkers, a trade union that was supportive of the tariffs, denounced them when it was extended against imports from Canada. Another US-based industry body, the Aluminium Association, has also expressed concern on the adverse impact of the US tariffs on American jobs in aluminium processing and across the supply chain.

To make mattes murkier on how ‘national security’ should be addressed, there are also a series of bizarre coincidences earlier this month. President Trump proposed settling the issue of ban against a Chinese company ZTE, a manufacturer of mobile phones and other electronic goods which have been banned for sometime based on concerns of possible espionage and violation of trade rules. Trump’s settlement deal was suggested curiously around the same time as China approved a significant loan to a project in Indonesia connected to the Trump business interests, and granted trademarks for his daughter- Ivanka Trump’s products.

Retaliatory Tariffs

Pushed against the wall, countries, one after the other, have started imposing retaliatory tariffs against the US. Reports indicate that India is set to impose tariffs to the tune of $240 million on 30 products imported from the US (including on almonds, apples and motorbikes). China has threatened 25% tariffs on 545 products imported from the US (including farm products, cars and crude oil). Retaliatory tariffs against the US by other countries include $3.3 billion by the EU, $12 billion by Canada, and $3 billion by Mexico.
In the long run, tit-for-tat discrimination and retaliatory policies simply further undermines the rules based system. But in the short term, there appears to be little choice, other than to take such measures which have a direct and immediate impact on the US. Parallel to this, ‘bilateral dialogue’ continues.

India’s commerce minister just returned after a visit to the US, and a US delegation is expected to visit this coming week. On the agenda are issues relating to tariff imposition, visas, etc.

In the murky era of measures and counter-measures, the only clear message appears to that chaos is inevitable, and multilateral trading rules are likely to play a subsidiary role to heavy bargaining. And this is where perhaps throwing a flashlight on the real impact of the policies not only on consumers but on producers/ manufacturers in the US- the alleged target beneficiaries of Trump’s policies, is required, to translate political realism into rational outcomes.

RV Anuradha is partner, Clarus Law Associates, New Delhi, and specialises in international trade and investment laws.

Published Date: Jun 18th, 2018 07:16 AM | Updated Date: Jun 18, 2018 07:16 AM IST