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Trade wars and international law

The self-defining nature of the national security exception and its subjective reading suggests that the WTO may not have the requisite jurisdiction to determine the legality of the measures taken by the US against China, say Joyeeta Banerjee and Rajdeep Banerjee

Joyeeta Banerjee and Rajdeep Banerjee |

‘How can foreign trade be properly regulated by uniform laws without some acquaintance with the commerce, the ports, the usages, and the regulations of the different states?” This pertinent question was raised by James Madison, fourth President of the United States, in the year 1788 in Federalist No. 53.

Foreign trade laws had remained a contentious issue for years. But the recent US-China conflagration has put the spotlight back on this issue.

International trade has been growing steadily in the last decade. WTO has suggested that the trade growth in 2017 was the strongest since 2011. But now the US is taking a strong position.

The U.S. Trade Representative last year initiated an investigation under Section 301 of the Trade Act of 1974 into the China’s acts, policies, and practices related to technology transfer and intellectual property.

Article 301 of the Trade Act of 1974 states that if the United States Trade Representative (USTR) determines the rights of the United States under any trade agreement are being denied or an act, policy, or practice of a foreign country violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any trade agreement, or is unjustifiable and burdens or restricts United States commerce, the Trade Representative is authorised to suspend, withdraw, or prevent the application of, benefits of trade agreement concessions to carry out a trade agreement with the foreign country or impose duties or other import restrictions on the goods.

The USTR Report held that China was involved in theft from the computer networks of U.S. companies which provided the Chinese government with unauthorized access to intellectual property and trade secrets which in turn helped China in achieving its strategic development goals, including its science and technology advancement, military modernisation as well as economic development.

Sections 301-310 of the Trade Act of 1974 which authorise certain actions by USTR, including the suspension or withdrawal of concessions or the imposition of duties or other import restrictions, in response to trade barriers imposed by other countries was earlier challenged before the WTO (DS152).

The complaint bought by the European Union alleged that by imposing strict time limits within which unilateral determinations must be made and trade sanctions taken, sections 306 and 305 of the Trade Act did not allow the US to comply with the rules of the Dispute Settlement Understanding (DSU) in situations where a prior multilateral ruling under the DSU on conformity of measures taken pursuant to implementation of Dispute Settlement Board (DSB) recommendations had not been adopted by the DSB.

It further alleged that the Trade Act nullified and impaired benefits accruing, directly or indirectly, to it under GATT 1994, and further impeded the objectives of GATT 1994 as well as WTO.

The Panel concluded that Section 304 was “not inconsistent” with US obligations because, while the statutory language of Section 304 in itself constituted a serious threat that unilateral determinations contrary to the obligations might be taken, the United States had lawfully removed this threat by the “aggregate effect of the Statement of Administrative Action (SAA)” and also made a statement before the Panel that it would render determinations under Section 304 in conformity with its WTO obligations.

But the Panel added the caveat that should the United States repudiate or remove in any way its undertakings contained in the SAA and confirmed in statements before the Panel, then, the finding of conformity would no longer be warranted.

The main allegation against China is that it imposes a different set of rules on the import of technology, industrial property rights and intellectual property rights than the rules which are applicable to technology transfers occurring between Chinese companies.

Thus, Chinese measures discriminate against foreign holders of intellectual property rights and restricts the foreign right holders’ ability to protect intellectual property rights in China which is contrary to China’s WTO obligations.

China further imposes restrictions on the rights of foreign intellectual property right holders to freely negotiate market-based contractual terms in licensing and other technology-related contracts concerning the transfer of technology to China.

Allegations have also been made against mandatory contract terms for contracts concerning the import of technology into China that discriminate against and are less favourable for foreign intellectual property rights holders.

In the context of joint ventures established with Chinese partners, China imposes mandatory contract terms that discriminate against and are less favourable for foreign intellectual property right holders, as well as restricting their ability to protect their intellectual property rights in China.

It has been alleged that the Regulations of the People’s Republic of China on the Administration of the Import and Export of Technologies (TIER) are inconsistent with the National Treatment principle of the TRIPS Agreement.

It is also required in China that all technology import contracts must be notified to and registered by the Chinese authorities and copies of contracts must be provided.

Licensors of imported technology indemnify licensees for all liabilities for infringement resulting from the use of the transferred technology. China also restricts the terms of import technology contracts by prohibiting a number of clauses in import technology transfer contracts.

A technology import contract cannot contain clauses restraining the transferee from improving the technology supplied by the supplying party or restricting the receiving party from using the improved technology.

Any improvements to imported technology belong to the party making the improvement. But domestic intellectual property right holders are not subject to such restrictions in the context of domestic technology transactions.

China has also been accused of not ensuring effective protection for foreign intellectual property rights holders of undisclosed information which is clearly contrary to the TRIPS obligations.

The Regulations for the Implementation of the Law of the People’s Republic of China on Chinese-Foreign Equity Joint Ventures (JV Regulation), operating separately or together with other listed instruments, appear to be inconsistent with the National Treatment principle of the TRIPS Agreement.

On 23 March 2018, the United States introduced additional ad valorem import duties of 25 per cent on steel and steel products imported from all countries except Canada, Mexico, Australia, Argentina, Korea, Brazil and the European Union.

United States later introduced additional ad valorem import duties of 25 per cent also on the steel products imported from Canada, Mexico and the European Union. Then the United States introduced certain quotas for Korean steel and after that the United States introduced quotas also for Argentina and Brazil.

Various countries have challenged the US actions before WTO. India has also challenged the US actions before the WTO arguing that the actions are in violation of Agreement on Safeguards as the United States has adopted and implemented the measures at issue inconsistently with its obligations, both substantive and procedural.

The main allegation is that US has imposed import duties on certain steel and aluminium products in excess of the prescribed duties set forth and provided in Part-I of the United States’ Schedule of Concessions and Commitments.

The measures do not apply uniformly to all imports of certain steel and aluminium products into the United States irrespective of their origin and thereby the measures at issue discriminate against imports of the said steel and aluminium products originating from India, with respect to the advantage, favour, privilege or immunity extended by the United States to certain selected WTO Members.

India has alleged that the measures implicitly introduce restrictions in the form of quotas, as the said measures reduce the imports of steel and aluminium products from the trade levels as existed prior to these measures.

The National Security Exception in Article XXI of GATT is one of the most controversial of the GATT exceptions. It permits WTO members to breach their GATT obligations for national security reasons.

It declares that nothing in the Agreement shall be construed to prevent any contracting party from taking any action that it considers necessary for the protection of its essential security interests taken in time of war or other emergency in international relations; or 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. Many countries have used this exception.

The European Economic Community in 1982 introduced trade restrictions against Argentina during the Falkland controversy. Ghana also boycotted Portuguese goods. In all such cases countries have tried to justify their actions using this exception.

Another case was the introduction by the Swedish Government of global quotas on imports of certain types of footwear. Swedish Government tried to justify by reasoning that as a result of relatively high production costs of the Swedish shoe industry, combined with Sweden’s traditional liberal trade policy, the volume of shoe imports had increased substantially resulting in decreased production which it argued had become a critical threat to the emergency planning of Sweden’s economic defence as an integral part of its security policy.

It was thus constrained to resort to temporary emergency measures. Under diplomatic pressure and strong disapproval from the international community, Sweden was constrained to hold consultations and eventually withdrew the global quotas within a period of two years.

One of the interesting cases on this issue was between the United States and Nicaragua where the American President issued an Executive Order in 1985 prohibiting all trade with Nicaragua and transactions relating to air and sea transportation between Nicaragua and the United States.

Nicaragua challenged this action before the GATT panel. But the Panel’s terms of reference stipulated that the Panel could not examine or judge the validity of or the motivation for the invocation of Article XXI by the United States.

Thus, the Panel did not consider the question of whether the terms of Article XXI precluded it from examining the validity of the United States’ invocation of that Article as this examination was precluded by its mandate.

The Panel thus concluded that as it was not authorised to examine the justification for the United States’ invocation of a general exception to the obligations under the General Agreement, it could find the United States neither to be complying with its obligations under the General Agreement nor to be failing to carry out its obligations.

The text of Article XXI clearly suggests that the WTO panel may not have the necessary jurisdiction to decide Article XXI cases as Article XXI differs from other exceptions to the GATT. The primary reason is that this exception appears to allow a member state to itself define the scope of this exception.

The text of the exception states that the GATT does not prevent a WTO member from taking any action which it considers necessary for the protection of its essential security interests.

Thus, the self-defining nature of the national security exception and its subjective reading suggests that the WTO may not have the requisite jurisdiction to determine the legality of the measures.

The ambiguity of the national security exception cannot be allowed to frustrate the working of the WTO. With proper diplomatic pressure, misuse of national security exception can be prevented to a large extent but one must not be oblivious to the fact that each country must be the judge in the last resort on questions relating to its own security.

The writers are Mumbai-based advocates and legal consultants.