Global trade: Why WTO rules must not be trumped

The US seems to be suggesting that since WTO-consistent trade remedial action has not made its domestic producers competitive, higher tariffs will be imposed. If all countries follow suit, then this very well will be the beginning of the end of a rules-based trading system.

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Trump’s announcement comes closely on the heels of “investigations” under one of the most opaque provisions of US law.

On March 8, US president Donald Trump announced a 25% tariff on imported steel and a 10% tariff on imported aluminium, on the reasoning that other countries’ trade practices endanger American “national security” by undermining domestic production. Imports from Canada and Mexico have been exempted from such tariffs, and the US has indicated its openness for bilateral discussions with other countries to have similar arrangements.

China, being the largest exporter into the US, will be most affected. The general view is that the impact will not be much for India’s limited exports that currently account only for approximately 2.4% and 2% of the US total imports of steel and aluminium, respectively. The issue, however, is not one of quantum of impact, as much as it pertains to the symbolic effect of such a sweeping and unprecedented unilateral measure by the US, and the chaos that it spells not only for global trade, but for international relations in general, in the event each country was to replicate such a step in a tit-for-tat move.

Trump’s announcement comes closely on the heels of “investigations” under one of the most opaque provisions of US law: Section 232 of the Trade Expansion Act of 1962, which provides a wide canvas for the US government—more specifically, the US department of commerce (DoC), and department of defence (DoD)—to determine when imports can be a “national security” concern. In the case of steel and aluminium imports, the DoD and the DoC concurred that these imports were “based on unfair trading practices” and impaired “national security”. The DoD, in the same breath, admitted that “the US military requirements for steel and aluminium each only represent about three percent of US production”, and therefore the recommendation of high tariffs would not “impact the ability of DoD programs to acquire the steel or aluminium necessary to meet national defence requirements.” The DoC report, however, notes that the “projected” national defence requirements may exceed the current requirements, and this can be achieved only by relying on domestic sources. Both reports acknowledge that there is sufficient, and even excess global capacity of both steel and aluminium. The purported rationale for the tariff increase is that the domestic industry needs to be restored to an “80% operating rate”, which the reports stipulate as the “minimum rate needed for the long-term viability of the industry”. There is however no justification for how this has been arrived at.
A WTO dispute questioning the US rationale is inevitable since the tariff increase breaches US commitments at the WTO. From the tone and tenor of the Section 232 reports, the US is likely to invoke “national security” as a defence. The WTO Agreements provide for a narrowly and carefully structured “security exception” to trade obligations under Article XXI of the General Agreement on Tariffs and Trade (GATT 1994). The security exception provides for some flexibility for a country’s own evaluation of what actions are “necessary for the protection of its essential security interests”, but does not provide unfettered discretion for countries to justify any protectionist action as a matter of “essential security”. To this end, GATT Article XXI lists three specific circumstances wherein it can be invoked, which includes actions relating to 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.

There appears to be little in the US reports to suggest how the criteria of Article XXI would be satisfied. The rationale for the ‘national security’ as articulated in the US DoC report treads on very thin ice since it admits that its defence requirements are currently being met, but further states that an operating rate of 80% of its domestic industry is important, even if its military establishments would not be requiring all of such production. The US appears to be saying that its industry’s non-competitiveness, and the reliance on imports, is a “national security” concern. In respect of steel, the report notes that: (i) US imports are nearly four times its exports; (ii) there has been closure of furnaces and drop in employment in the US; (iii) China is the largest exporter of steel, and China’s excess capacity alone exceeds the total US steel-making capacity; (iv) in an average month, China produces nearly as much steel as the US does annually; and finally (v) the US has 169 anti-dumping and countervailing duty orders in place on steel, of which 29 are against China, and there are several ongoing investigations. The report on aluminium is along similar lines.

The US, therefore, seems to be suggesting that since WTO-consistent trade remedial action (in the form of anti-dumping and countervailing duty orders) has not made its domestic producers competitive, higher tariffs will be imposed. This turns the entire concept of global trade based on the principle of comparative advantage, on its head. If all countries follow suit, then this very well be the beginning of the end of a rules-based trading system.

While there is no definitive jurisprudence on the security exception under GATT Article XXI, the provision has been considered in a couple of instances before. For example, while examining a dispute initiated by Nicaragua against the US restrictions of products of Nicaraguan origin, a 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 emphasised on a careful balancing of security needs against the need for stable trade relations.
It is important to test the US’s expansive interpretation of ‘national security’ against WTO norms. Such a dispute will also likely examine whether the US considered less trade restrictive alternatives (a crucial element for deciding whether a trade restriction is necessary in the first place). For example, WTO rules allow government entities to procure exclusively from domestic sources, when there is an overarching government purpose, and no commercial resale. Accordingly, a less trade restrictive alternative would be for the US military establishment to procure exclusively from domestic manufacturers, and even stockpile to ensure a full capacity utilisation of domestic units.

Commentators have pointed out that the US action will do little for even its stated objective, i.e., it is unlikely to resurrect the domestic industry in a significant way. But how other countries react will set the stage for the future of global trade. Collective and considered action of all other WTO members is therefore crucial, including that any retaliation is done in a WTO consistent manner.

Tit-for-tat discrimination and retaliatory policies will be self-defeating and not achieve much purpose. This is a time for clear demonstration of faith in the rules-based trading system. At the same time, a collective signalling to the US is crucial too—that its abrasive unilateral measures, flouting trade rules, will be fought under the very rules of the system that the US was instrumental in establishing.

By RV Anuradha, Partner, Clarus Law Associates, specialising in international trade and investment laws

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First published on: 19-03-2018 at 03:41 IST