Economic Diplomacy Blog
April 27, 2018.
The war on trade is settling into a new phase. Hard lines of trade are being drawn and will increasingly test the capacity, and durability, of the World Trade Organization (WTO), set up to administer the rules-based trading system. In most ways, the WTO system is showing itself robust and still leading a viable multilateral system. However, it is being challenged in a potentially existential way by the use of national security as a justification for aggressive trade actions.
A previous essay looked at how aggressive trade actions can lead to a hot war. A critical link in that scenario is that trade could trigger serious national security concerns. National security is the first duty of any legitimate sovereign. It triggers a deeply emotional response that can be easily exploited for protectionist measures. Escalation of trade conflicts from the cold calculation of commercial transactions to the passions of national pride and safety approaches a worrisome slippery slope.
The original General Agreement on Tariffs and Trade (GATT; and updated in the Uruguay Round with the creation of the WTO in 1994 as the “GATT 1994”) recognized the importance of national security. It set forth in Article XXI that nothing in the Agreement would interfere with any actions taken by a Member with regard to that Member’s national security. It is worth reviewing this in detail:
Nothing in this Agreement (GATT) shall be construed:
- To require any contracting party to furnish any information the disclosure of which it considers contrary to its essential security interests; or
- To prevent an contracting party to take any action which it considers necessary for the protection of its essential security interests
- Relating to fissionable materials or the materials from which they are derived;
- Relating to the traffic in arms, ammunition and implements of war and such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment;
- Taken in time of war or other emergency in international relations; or
- Prevent any contracting party from taking any action in pursuance of its obligations under the UN Charter for the maintenance of international peace and security.
The GATT 1994 Agreement is built on layers of positive obligations, but recognizes the need for exceptions. Article XX outlines many, including monetary stability, renewable resources, moral and religious reasons, protecting natural and renewable resources, archeological considerations, prison labor, short supply, protecting against monopolies and protecting patents, among others. All these exceptions, however, are constrained by the overarching principle articulated in its Chapeau: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade…
In contrast, Article XXI has no limiting preamble. Moreover, it is distinct in that it is “self-declaratory.” Unlike the case with the other exceptions commonly found in trade agreements, Article XXI allows each WTO Member to determine and define what it considers to be its own “essential security interests.” The Article offers some defining constraints, but the Member need not meet an objective standard. In other words, it can take any action it considers necessary to protect it’s own self-defined essential security interests.
The logic behind Article XXI is undeniable. Nations are reluctant to subject their judgment of their country’s security interests to review by another body (i.e. WTO or any arbitral panel). A deal as broad and deep as the one creating the WTO could not be negotiated without an Article XXI. However, the scope for abuse is vast. For the past 70 years, thoughtful diplomacy and prudent leadership—largely from the US and the EU– with a keen eye on sustaining the rules-based system has constrained claims of ‘national security.’
It has been used, but sparingly. In the mid 1970’s Sweden cited Article XXI to justify restricting imports of certain footwear because a fall in the production of domestic footwear posed “a critical threat to the emergency planning of its economic defence.” It was abandoned a few months later, after much amused opprobrium from its trading partners.
A decade later, the United States pulled out Article XXI to defend measures prohibiting imports of all goods and services from, and U.S. exports to, Nicaragua. Nicaragua’s challenge at the GATT failed. The United States successfully blocked the Panel from examining the validity of using Article XXI. While the Panel remonstrated that a party relying on the exception must balance its need to do so against the more fundamental need for stable trade regulation, the U.S. position prevailed– that Article XXI leaves it to each contracting party to judge what action it considered necessary for the protection of its own essential security interests.
Again in the mid 1990’s, National security was raised again to justify the so-called Helms-Burton Act. The Act extended the U.S. embargo on Cuba to penalize foreign companies “trafficking” in property formerly owned by U.S. citizens but confiscated by Cuba after the Cuban revolution. It is difficult to argue that foreign companies trading with Cuba posed a genuine national security interest, certainly given that the Russian missiles were removed in 1962. Resisted by President Clinton, the political realities in the U.S regarding Cuba were such that it could not be abandoned. Understood widely by U.S trading partners as a domestic political issue, it, nonetheless, stood lonely but virtually unchallengeable as a self-declared essential security interest.
This year, we see the Article XXI defense rise up again, and in a way that moves it perilously close to the slippery slope. On request of President Trump, the Department of Commerce has found that the loss of production of domestic steel and aluminum constitute a national security threat that will justify an Article XXI defense of any and all import restrictions on those products. The President can and does declare national emergencies, with virtually no legal recourse for other private parties to challenge it. However, the President immediately diluted the justification by holding the threat of these tariffs out as a bargaining chips—to the Koreans for a new US-Korean FTA; to the Canadians and Mexicans as hard pressure on NAFTA; to the Chinese to implement better intellectual property rights for American business; and to the Europeans as leverage in discussions to re-start Trans-Atlantic negotiations.
This tactic is especially troublesome because he is negotiating away the import restrictions with the largest suppliers of steel and aluminum to the U.S. market. If imports are a national security problem, how do we justify negotiating away the restrictions with the largest suppliers? If aluminum is critical to our aviation industry—one of our largest export industries—and, and autos, and construction, and national defense production, how is it that we benefit from restricting access in the first place?
The national security concern seems unconvincing given the economic conditions in the industries. Steel has been episodically protected for the past 50 years and still America imports it heavily, mostly from our closest partners, Canada, Brazil, South Korea and Mexico. Aluminum is a rapidly growing industry that should foster domestic growth. The price of aluminum climbed 26 per cent in the two years leading to March of this year. The U.S. trade actions pushed the price up an additional 10 percent. Given the booming prices and shortage of supply for a product critical to our exports and military, it is hard to justify an Article XXI claim.
The slippery slope draws nearer as President Trump asks his USTR and Commerce Secretary to assess the likelihood that imports of rare earths can be a national security problem. If they agree that it is and propose import restrictions, will it be just another bargaining tool for the Administration to use in the Art of the Deal? As appealing as it is to strengthen our negotiating leverage, it is also dangerous if it threatens the institutions on which the negotiating framework depends.
Managing an aggressive trade strategy like the one the United States seems to be undertaking is a highly delicate task. The contentious departure of Gary Cohn, National Economic Advisor to the President, over the steel and aluminum tariffs suggests strongly that this is not a well-constructed strategy. It seems more like impulsive negotiating tactics with political overtones but with profound implications for the global trading system if not managed with extremely thoughtful and diplomatic leadership.
Russia has recently used an Article XXI justification for broad restrictions on Ukrainian commerce. The EU weighed in to argue that Russia’s use of national security to restrict Ukraine’s access to international markets should be carefully scrutinized. The United States jumped in to support Russia: “Every Member of the WTO retains the authority to determine for itself those matters that it considers necessary to the protection of its national security” and whatever action are necessary to ensure it.
This logic is persuasive, but there is the slippery slope. If the United States too freely uses, or defends as others pick up the pace, the Article XXI national security defense in ways not clearly tied to critical national security concerns, but instead as tool to generate negotiating leverage, the walls could crumble quickly. Other countries would be foolish to not use this tool. Retaliations justified in turn on essential security grounds and without any WTO examination or authorization could finally erase the institution’s role in international trade. Such escalation is what could turn trade spats into a full-blown war. Ironically, U.S. trade tactics could be the vehicle that brings down the trading system it has spent the past 75 years creating.
Robert A. Rogowsky is Professor and Program Co-chair of the Masters in International Trade & Economic Diplomacy at the Middlebury Institute of International Studies in Monterey, CA and Adjunct Professor of Trade & Diplomacy at Georgetown University’s Masters School of Foreign Service.
These essays are the opinions strictly of the author. They do not necessarily reflect the views of the Institute or any officials of the Institute.