When China joined the World Trade Organization (WTO) in December 2001, experts in the United States hotly debated whether the WTO would influence China to liberalize its economy, or whether China would reduce the WTO’s power as a global tool for trade liberalization. With respect to the latter, one of the United States’ main concerns was China’s potential overuse of the WTO’s national security exception to justify any disguised trade barriers in the name of protecting its “national economic security,” a broad and vague term that could encompass any of China’s industrial policy plans. Who would have thought that within two decades, it would be the United States stridently using the national security exception to justify its otherwise trade-distorting actions at the WTO?

This article briefly examines the evolving views regarding the WTO national security exception in the US and Chinese governments, and the impact of these views on cross-border trade and on the WTO as an institution. The WTO national security exception is particularly topical now, on the heels of the first-ever WTO decision on national security (issued in April of this year) and with other disputes tackling the issue head-on in the second half of 2019 and 2020. Our intent is not to join the ongoing and rigorous debate about whether or not the national security exception should be “self-judging” (i.e., whether a WTO panel can review and perhaps “second guess” the legitimacy of a Member’s invocation of the exception). Nor do we engage in the distinct, but related, debate regarding the scope of the national security exception.

Regardless of how the exception is interpreted, the excessive invocation of the exception itself opens a Pandora’s box that will damage the viability of, and ultimately unwind, the WTO system as a whole.

Regardless of how the exception is interpreted, the excessive invocation of the exception itself opens a Pandora’s box that will damage the viability of, and ultimately unwind, the WTO system as a whole. Members have long recognized that the national security exception threatens to swallow the WTO agreements. As the world’s two largest economies continue to escalate their ongoing trade dispute and justify their protectionist policies under the guise of national security measures, there is little to stop the rest of the world following suit.

The WTO national security exception is found in the General Agreement on Tariffs and Trade (GATT) Article XXI, the General Agreement on Trade in Services (GATS) Article XIV bis, and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) Article 73. The texts of the three provisions are nearly identical and generally provide that nothing in the agreement shall be construed “to prevent any Member from taking any action which it considers necessary for the protection of its essential security interests,” (1) related to fissionable materials, (2) related to traffic in arms, or (3) “taken in time of war or other emergency in international relations.”

Throughout the history of the WTO and its predecessor, the GATT, Members have shown remarkable restraint in avoiding invoking the national security exception. Negotiators of the GATT in 1947 recognized that, although it was essential to include a national security exception in the agreement, the Members would provide the only check on the legitimate use of the exception. The Chairman of the negotiations in 1947 noted, for instance, that “the spirit in which Members of the Organization would interpret these provisions was the only guarantee against abuse.”

In the few cases in which a Member has invoked the exception, the Member was often criticized for doing so. For example, in the GATT era, Sweden invoked “the spirit of Article XXI” to justify its introduction of a global import quota system for footwear in November 1975, arguing that the decrease in domestic production was threatening the country’s ability to secure essential products in case of war or another emergency. A number of countries objected to this approach in the discussion of this measure in the GATT Council, questioning whether the actions were justified under the GATT. The quotas were not formally disputed, however, and were mostly lifted by July 1977.

Similarly, the United States has long expressed concern regarding the breadth and potential misuse of the national security exception. During the 1947 GATT negotiations, the US Delegate stated that the drafters “thought it well to draft provisions which would take care of real security interests and, at the same time, so far as we could, to limit the exception so as to prevent the adoption of protection for maintaining industries under every, conceivable circumstance…” He went on to caution that “we cannot make it so broad that, under the guise of security, countries will put on measures, which really have a commercial purpose.” This indicates an early belief by the United States that the conduct justified under the security exception should be carefully circumscribed.

Since at least 1985, the United States has argued that the exception is self-judging, however, prior to the Trump administration, the United States invoked the national security exception on only two occasions. In the first instance, the United States claimed that the national security exception applied to its embargo of Nicaragua in 1985. A GATT panel was established to decide the dispute, but eventually the United States left the exception outside of the panel’s terms of reference. At this time, the United States argued that the “provision left it to each contracting party to judge what actions it considered necessary for the protection of its essential security interests.” In the second instance, the United States invoked the exception to defend its secondary boycott against Cuba under the Helms Burton Act. The secondary boycott never went into effect, however, and the WTO proceedings were eventually suspended. It is worth noting that, in both cases, there was little debate as to whether these were truly national security concerns.

As for China, because it did not accede to the WTO until December 2001, there is less historical context through which to view China’s positions on the national security exception. There has always been concern that China may misuse this exception, as noted earlier, but until very recently, the country has remained relatively mute on the issue. Since joining the WTO, it has become even more apparent that China maintains quite a complex legal environment for investment and trade, with many of its restrictive trade and industrial policies containing shades of national security. But to the surprise of many, China has never formally invoked the national security exception in any of its WTO disputes.

But to the surprise of many, China has never formally invoked the national security exception in any of its WTO disputes.

Indeed, very few countries have. It was not until very recently, in April 2019, that a WTO panel has interpreted and made findings regarding the national security exception provision. In a dispute between Russia and Ukraine in which Russia invoked the national security exception to defend its measures blocking trade between Ukraine, Kazakhstan, and the Kyrgyz Republic transiting through Russia, the panel attempted to find a middle ground between those who believe the exception is wholly self-judging and those who felt a WTO tribunal can adjudicate such an invocation. The panel limited its review to (1) whether one of the three circumstances (fissionable materials, trafficking of arms, or war or international emergency) of the national security exception had occurred and (2) whether the measure has a plausible connection to the circumstance identified.

In this dispute, the United States argued that only the Member invoking the exception may determine what is essential to its national security and that the exception is therefore not up for consideration by the WTO. This position is consistent with the United States’ long-held views regarding the self-judging nature of the exception, and supports the United States’ recent invocation of the national security exception to defend its duties on steel and aluminum, its proposed duties on automobiles, and its decisions on restricting business with Huawei and other Chinese-related telecommunication companies. However, the United States’ invocation of the exception in these recent instances represents an evolution of the views of the United States regarding the limited scope of the exception prior to the Trump Administration.

For its part, China in this dispute has argued that the exception is fully justiciable and subject to a number of limitations. This is arguably different from China’s prior statements about the primacy of its domestic industrial policies, its sovereignty, and its “national economic security.” China’s new approach to the national security exception is no doubt informed by its opposition to the United States’ increasing reliance on unilateral trade tools by the Trump Administration. In its 2019 “Proposal on WTO Reform,” China describes an issue as follows:

Certain Member has imposed unwarranted tariffs on steel and aluminium products and threatened to raise tariffs on auto and auto parts to protect its domestic industries, using national security as a pretext. It has also improperly extended the coverage of export control measures and administered such measures in a non-transparent or unjust manner. These actions have disturbed the international trade order and international market, impeded normal technological exchanges and applications, impaired the interests of Members concerned and undermined the relevant rules of the WTO.

China’s proposed solution now is to “enhance notification requirements” when the exception is invoked, and to allow Members affected by such measures to reciprocate “so as to maintain the balance of their rights and obligations under the WTO.”

Thus, the tables have turned. Today, the United States supports a broad, non-justiciable national security exception, while China favors a more limited exception subject to judicial review. The United States now prioritizes unilateralism and sovereignty, while China seeks multilateralism and global balance of rights and obligations. The United States says merely invoking national security is sufficient to justify its actions, while China is now insisting on more transparency, more reasoning, and notification requirements.

Some may argue that China’s change of heart is not ideological, but strategic. They may also argue that the United States has been more consistent over the years regarding the non-justiciability of the national security exception in the WTO. The fact remains, however, that until this year, all WTO Members, including the United States and China, have refrained from invoking the exception with such regularity, and over such broad trade-related measures.

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The impact of all this is worrisome for the WTO system and to the private sector that relies on this system. The national security exception houses a dilemma that simmers under the surface of all treaties:  how does a country maintain sovereignty while signing some of it away?  As described earlier, there has always existed a kind of “gentlemen’s agreement” regarding the national security exception, a mutual ceasefire. The exception was needed in the agreement to provide the signatories comfort, but it was not intended to be used except in very narrow circumstances. Any time one invokes this exception, this simmering dilemma is brought to a boil. The exception is an explicit reminder that, at the end of the day, a sovereign nation can always take its toys and go home if it does not want to play anymore.

The overuse of the national security exception is prone to snowballing, particularly if it is being used by the largest trading partners in the WTO. Why should one WTO Member abide by its commitments when its trading partners skirt theirs? China may currently limit its use of this exception, but if the United States continues to invoke it, China is likely to feel the need to respond in kind. The national security exception has not yet swallowed the WTO agreements because the Members have not yet allowed it to. But the risk is clearly there and quite immediate. The United States and China are the world’s two largest economies; their views of the national security exception will likely determine whether the WTO, as a global rule-of-law and liberalizing trading system, ultimately survives or not.

 

Stephen S. Kho is an international trade partner at Akin Gump Strauss Hauer & Feld LLP. He handles matters related to trade policy and international dispute resolution. He spent nine years at the USTR in the Executive Office of the President. As the principal attorney on China matters, he was responsible for developing dispute and advocacy positions related to China’s obligations in the WTO.

Thor Petersen is an international trade associate at Akin Gump Strauss Hauer & Feld LLP. He advises US and international clients in complying with a range of international trade laws and regulations. His work comprises international trade policy, WTO disputes, and trade remedies, as well as advising on foreign investment in the United States.

Photo: World Trade Organization

Posted by Stephen Kho and Thor Petersen