The WTO Panel Report on Article XXI and its Impact on Section 232 Actions

On Friday, April 5, 2019, a World Trade Organization (“WTO”) panel issued its report interpreting Article XXI of the 1994 General Agreement on Tariffs and Trade (“GATT 1994”)[1] —the so-called “essential security exception”—in a dispute between Russia and Ukraine.[2] The report concluded, contrary to Russia’s position, that the WTO possesses “jurisdiction to determine whether the requirements of Article XXI(b)(iii) of the GATT 1994 are satisfied.”[3] Accordingly, the panel held that it could review whether (1) the member invoking the exception has sufficiently articulated its essential security interests,[4] and (2) the measures implemented are plausibly related to the protection of such interests.[5]

The report has been viewed by various commentators as significant because the United States has long taken the position that actions taken by WTO members for self-declared national security reasons are not reviewable by a WTO panel. The U.S. has articulated the same position in connection with its actions under Section 232 of the Trade Expansion Act of 1962, as amended, as it pertains to the imposition of Section 232 tariffs on aluminum and steel in response to WTO complaints lodged by various trading partners.[6] For reasons outlined below, however, the recent panel report does not necessarily provide guidance on how the justiciability issue will be decided by other panels or by the Appellate Body. Nor does the panel report provide a basis for predicting that even if justiciable, U.S. actions are inconsistent with WTO obligations.   

1. The Parties’ Arguments

The dispute between Ukraine and Russia involved certain restrictions on the transit of goods from Ukraine to other countries via the Ukraine-Russia border. These measures included restrictions on transit by road and rail from Ukraine to Kazakhstan or the Kyrgyz Republic via the Ukraine-Russia border; the imposition of additional requirements for identification seals and registration cards at certain control points; a prohibition on all transit of certain classes of goods unless otherwise authorized; and a prohibition on the transit of goods subject to Russian sanctions through the Russia-Belarus border.[7] Ukraine argued that these restrictions violated Russia’s obligations under Article V of GATT 1994 and its commitments under its Accession Protocol.[8]

Russia, without addressing Ukraine’s factual or legal arguments, argued that the matters at issue were beyond the panel’s jurisdiction because Russia’s actions were taken to protect its essential security interests “in response to the emergency in international relations that occurred in 2014 that presented threats to the Russian Federation’s essential security interests.”[9] Accordingly, Russia argued that “the panel should limit its findings . . . to a statement of the fact that Russia has invoked Article XXI(b)(iii), without further engaging on the substance of Ukraine’s claims.”[10] Russia further contended that this conclusion is mandated by the “explicit wording of Article XXI,” which confers to the invoking member discretion “to determine the necessity, form, design and structure of the measures taken pursuant to Article XXI.”[11]

Ukraine disagreed with this reading of Article XXI, arguing instead that the provision “lay[s] down an affirmative defen[s]e for measures that would otherwise be inconsistent with GATT obligations.”[12] While the text of Article XXI(b) provides discretion to members to decide what measures are necessary for the protection of their essential security interests, Ukraine contended, this grant of discretion is not absolute.[13] Rather, the Article provides the panel power to make an “objective assessment” as to whether members relying upon the exception have done so in good faith.[14] In making such a determination, a panel must assess whether the interests relied upon by the invoking member in relation to the measures at issue can reasonably be deemed “essential security interests” and whether such measures are directed at safeguarding such interests.[15]

2. The Panel’s Conclusion and Reasoning

After assessing the parties’ arguments, the panel concluded that, contrary to Russia’s position, Article XXI is justiciable and subject to some degree of review by a WTO panel. In so holding, the panel began by outlining the text of Article XXI.[16] Article XXI provides:

1. whether actions are necessary for the protection of essential security interests; and/or
2. what the member’s essential security interests are; and/or
3. whether its essential security interests relate to “fissionable materials or the materials from which they are derived;” “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;” or are “taken in time of war or other emergency in international relations.”[18]

On the basis of the text, context, and negotiating history of Article XXI, the panel concluded that the Article leaves the first determination as to the necessity of the measures at issue to the discretion of the invoking member but makes the other two determinations subject to at least some degree of objective review by the dispute settlement panel.[19]

The panel rejected the third option—that the phrase “‘which it considers’ . . . qualifies the determination of the sets of circumstances described in the enumerated subparagraphs of Article XXI(b)”—on grounds that each element in those subparagraphs was objectively determinable.[20] In other words, whether the actions are sufficiently related to one of the enumerated areas in Article XXI(b)(i) and (ii),[21] whether there exists “a war or other emergency in international relations” under Article XXI(b)(iii), and whether measures are undertaken during such times are all objective determinations and not set by the member’s subjective consideration of the situation.[22]

Turning to the term “emergency in international relations,” the panel explained that such situations are generally present where there is “armed conflict, . . . latent armed conflict, . . . heightened tension or crisis, or . . . general instability engulfing or surrounding a state.”[23] The panel further elaborated, “[s]uch situations give rise to particular types of interests for the [m]ember in question, i.e. defen[s]e or military interest, or maintenance of law and public order interests.”[24] “Political or economic differences between [m]embers,” however, “are not sufficient, of themselves, to constitute an emergency in international relations for purposes of subparagraph (iii).”[25]

In so holding, the panel reasoned that “[t]he use of the conjunction ‘or’ with the adjective ‘other’ in ‘war or other emergency in international relations’ . . . indicates that war is one example of the larger category of ‘emergency in international relations.’”[26]  Additionally, the placement of subparagraph (iii) in a list with subparagraphs (i) and (ii), both of which relate to matters of defense, military, and the maintenance of law and public order, suggests that the same type of interests are at issue in subparagraph (iii).

The panel then turned to the negotiating history of Article XXI, concluding that its interpretation of Article XXI aligned with the original intent of the drafting members.[27]  As explained by the panel, Article XXI arose from a proposal put forth by the United States during negotiations on the International Trade Organization (“ITO”). Though the ITO was never ratified by the United States Senate and thus never established, portions of its charter, including a variation of the current essential security exception, were incorporated into the GATT 1994.

In its original format, the exception was placed within the ITO’s General Commercial Policy chapter and included variations of Articles XX and XXI of the GATT 1994 in one single provision. By February 1947, the draft prepared at the negotiating session in New York read:

As negotiations proceeded, the United States suggested moving portions of the above text regarding essential security out of the General Commercial Policy chapter and placing it at the end of the ITO charter.[29] The aim of this relocation was to make the provision applicable to the entire charter as opposed only to the General Commercial Policy chapter. During negotiations on this proposal, the panel explained, contracting parties specifically contemplated “whether any element of the security exceptions should be subject to review by the Organization” and ultimately concluded that “the scope of unilateral action accorded to a [m]ember invoking the security exceptions would be limited to the necessity of the measure and would not extend to the determination of the other elements of provision.”[30]

Accordingly, the United States proposed the following language, to be placed in Article 94 of the charter:

In response to concerns raised by the Netherlands regarding the ambiguity of the terms “essential security interests” and “emergency in international relations,” the panel cited the United States’ explanation that:

Additionally, in response to Australia’s question regarding whether the relocation of the exception to the end of the charter would mean that it would no longer be subject to consultation and dispute settlement, the United States responded that while “an action taken by a [m]ember under Article 94 could not be challenged in the sense that it could not be claimed that the [m]ember was violating the [c]harter,” if the invoking member’s action “affect another [m]ember, . . . that [m]ember would have the right seek redress under” the ITO’s dispute settlement and consultation chapters.[33]  On the basis of this representation, the panel concluded, Australia agreed to the United States’ proposal.

Accordingly, Article 94 of the ITO, nearly identical to Article XXI of the GATT 1947 and 1994, read:

On the basis of this negotiating history, the panel concluded that Article XXI was intended to remain subject to consultations and dispute settlement and that though the Article preserved “some latitude” for the parties to determine their essential security interests, this discretion was to be balanced by “limiting the circumstances in which [the exception] could be invoked to those specified in the subparagraphs of Article XXI(b).”[35]

The panel then went on to assess the other two possible hypotheses regarding the specific determinations left to each member’s discretion. The panel concluded that although determining essential security interests “is left, in general, to every [m]ember,”[36] such discretion is limited by the “obligation of good faith,” which “underlies all treaties, as codified in Article 31(1) . . . and Article 26 . . . of the Vienna Convention [on the Law of Treaties].”[37] To satisfy this obligation, “the measures at issue [must] meet a minimum requirement of plausibility in relation to the proffered essential security interests, i.e. that they are not implausible as measures protective of these interests.”[38]  Accordingly, members must articulate their essential security interests with sufficient specificity so as “to demonstrate their veracity.”[39] The further removed the “emergency in international relations” is from an armed conflict or a situation of breakdown of law and public order, the less obvious are the member’s defense, military, or law and public order maintenance interests and the greater the specificity required.[40] 

Interestingly, the panel noted that “[a] glaring example of” a violation of good faith would be if a member “sought to release itself from the structure of ‘reciprocal and mutually advantageous arrangements’ that constitutes the multilateral trading system simply by re‑labelling trade interests that it had agreed to protect and promote within the system, as ‘essential security interests’, falling outside the reach of that system.”[41]

Finally, as to the first hypothesis—that Article XXI leaves it to each member’s discretion whether measures are necessary for the protection of its essential security interests—the panel affirmed that such discretion must lie with each member “if the adjectival clause ‘which it considers’ is to be given legal effect.”[42]

The panel then turned to apply this standard to the factual circumstances before it. Although Russia had failed to disclose detailed information regarding the “emergency in international relations” to which its measures related, the WTO held that it had satisfied its obligation by providing the following broader facts:

Based on this information and other publicly available information, including the United Nations General Assembly’s determination that the situation between the two countries had escalated to the point of an armed conflict, “the Panel [wa]s satisfied that the situation . . . constitute[d] an emergency in international relations.”[44]

The panel then turned to determine whether the specific measures implemented by Russia were plausibly related to the protection of Russia’s essential security interests arising out of the emergency. These measures (1) restricted transit by road and rail from Ukraine to Kazakhstan or the Kyrgyz Republic via the Ukraine-Russia border; (2) imposed additional conditions for identification seals and registration cards at specific control points; (3) prohibited all transit for certain classes of goods unless authorized; and (4) banned all transit of goods subject to Russian sanctions from going across the Russia-Belarus border.[45] Because all such measures restricted the transit of goods across the Ukraine-Russia border and because there was an emergency affecting “the security of the Ukraine-Russia border” that “is recognized by the UN General Assembly as involving armed conflict,” the panel concluded, “Russia has met the requirement for invoking Article XXI(b)(iii).”[46]

3. The United States’ Long-Standing Position on Article XXI

The question of whether Article XXI vests WTO dispute settlement panels with the power to review and adjudicate members’ invocation of the exception has been an issue of longstanding importance to the United States. The United States has consistently argued through various administrations that the exception is non-justiciable and therefore “leaves its invocation to the judgment of a [m]ember through the phrase ‘that it considers essential.’”[47]

For example, in 1985, the administration of Ronald Reagan took such a position in defending the United States’ imposition of a trade embargo on all imposts and export of goods and services to and from Nicaragua after finding that “an unusual and extraordinary threat to national security and foreign policy existed.”[48] When Nicaragua requested a special meeting of the GATT Council on the embargo, the United States argued that “[i]t was not for GATT to approve or disapprove the judgment made by the United States as to what was necessary to protect its national security interests; GATT was a trade organization, and had no competence to judge such matters.”[49] Finally, when the United States acquiesced to the establishment of a GATT panel, it provided the caveat that the parties “understood that the Panel could not examine or judge the validity of or motivation for the invocation of Article XXI:(b)(3) by the United States in this matters.”[50]

Likewise, in 1997, the United States, under the administration of Bill Clinton, adopted a similar argument in defending sanctions against Cuba. After Cuba shot down two American civilian airplanes in February 1996, the United States imposed strict economic sanctions on Cuba, including secondary boycott measures which impacted third parties including the European Community.[51] The European Community filed a request for consultation with regards to these measures, and the United States invoked Article XXI in response.[52] In so doing, the United States argued that the dispute was “not fundamentally a trade issue and thus the trade panel should not be requested to decide on the matter.”[53] Before the panel could reach a determination on the issue, however, the European Community requested the panel to suspend proceedings so the parties could reach a settlement through negotiations.[54] A final resolution of the dispute was reached outside of the WTO system in 1998.[55]

In line with this prior line of reasoning, the U.S. again put forth a similar position in its third-party submission in the dispute between Russia and Ukraine.[56] In so doing, the United States pointed to a different reading of the drafting history of Article XXI than that cited by the panel in the Russia-Ukraine report. Going further back in the history of Article XXI, the United States emphasized that an original proposal of the provision, which “lacked the key phrase . . . regarding action by a Member that ‘it considers necessary for’ the protection of its essential security interests” was discarded and replaced with a proposal that did include such language.[57] The inclusion of such language, the U.S. argued, evidences the drafting parties’ clear intent to leave matters covered by Article XXI to each member’s sole discretion.

As originally drafted, Article XXI was combined in a single provision with what is currently Article XX and only applicable to certain parts of the charter. The proposed text at that time read:

This draft was not adopted, however.[59] Rather, the version adopted was one incorporating the United States proposals to move the security exception to its own chapter at the end of the charter, make it applicable to the charter in its entirety, and include the introductory texts “Nothing in this Charter shall be construed to prevent the adoption or enforcement by any Member of measures” and later, “any action which it may consider to be necessary to such interests” at the beginning of the provision.[60] That this was the version the parties adopted, the United States argues, is evidence that the provision was explicitly intended to leave its invocation to each member’s discretion.

With regards to those questions from the Netherlands and Australia cited by the panel, the United States emphasized that its responses at that time too recognized that members “could not claim that another [m]ember had violated the security exception and therefore unsuccessfully invoked that exception,”[61]and that “in situations such as times of war, . . . ‘no one would question the need of a [m]ember, or the right of a [m]ember, to take action relating to its security interests and to determine for itself . . . what its security interests are.’”[62] This drafting history, the United States has argued, “shows that the self-judging nature of the security exception in what was to become Article XXI was an intentional choice” by the contracting parties.[63]

The United States has adopted this longstanding position in responding to numerous disputes brought before the WTO by trading partners challenging the imposition of Section 232 tariffs on steel and aluminum. In those disputes, the United States has invoked Article XXI as non-justiciable and argued that the WTO panel must limit its determination to recognizing the United States’ invocation without performing any further analysis of the arguments presented.[64]

4. Impact on the U.S.

Given the United States’ view that actions taken in the name of national security are not reviewable by the WTO dispute settlement system, various commentators have opined that the Russia-Ukraine panel report has delivered a blow to the United States’ ability to defend its measures on steel and aluminum under Section 232 of the Trade Expansion Act of 1962, as amended.  For the reasons below, however, it is unclear what significance the Russia-Ukraine report carries for the United States’ actions under Section 232.

First, WTO dispute settlement is intended to resolve disputes between parties, not create precedent that binds other parties. Thus, a panel decision can reach a result that is contrary to a country’s view without there being an obligation for the non-party country to conform. Subsequent panels can and sometimes do reach different results.[65]

Second, because both Ukraine and Russia can still appeal the panel’s findings to the WTO’s Appellate Body, the conclusions therein are not yet even binding on the two parties there. If either party decides to appeal the decision, it is unclear how quickly such an appeal would be processed. Appeals are generally subject to a sixty- to ninety-day timeline but the Appellate Body has taken significantly longer to issue decisions in most cases in the last decade. If appeal is taken and the issue is not decided within ninety days or by December 10, 2019, when the terms of service for two of the remaining appellate body members lapses (rendering the appellate body with insufficient members to adjudicate), it is unclear from the U.S. perspective what effect the report would carry even on the parties to the dispute.

Third, U.S. actions on steel and aluminum under Section 232 have their own timelines for resolution. Unless the panels in those disputes issues adverse decisions for the United States and those decisions are then affirmed on appeal, the U.S. will not be obligated to address any adverse report or decision.  If the panel reports are not issued and appeals taken before December 10, absent resolution of the issues on the Appellate Body, there will be no Appellate Body to hear an appeal and hence no obligation on the U.S. to comply with the panel decision if adverse (assuming the US were to appeal). Even if appealed before December 10, 2019, the ultimate resolution of the Section 232 disputes would be highly unlikely to occur before December 10, 2019. Therefore, much will depend on the outcome of ongoing efforts to reform the Dispute Settlement Understanding.

Fourth, while many have opined that if the WTO can adjudicate essential security questions, then a panel and the Appellate Body would find U.S. actions under Section 232 inconsistent with Article XXI, that question has not been resolved in a dispute. Pending a resolution that finds a violation that is affirmed and adopted by the Dispute Settlement Body, there is no reason that the Administration need change its approach to the propriety of applying Section 232 as it has to date. 

Finally, even if the panel in the Section 232 WTO disputes found U.S. actions reviewable and not justified by Article XXI, the U.S. is not obligated under WTO rules to bring itself into conformance by removing the tariffs but can face compensation or retaliation instead. Since many countries that are subject to Section 232 tariffs have already retaliated against the United States, the U.S. would likely face no substantial additional retaliation if it did not change its decision to impose tariffs on those countries.

In sum, despite this ruling from the WTO panel on an issue of longstanding importance to the United States through various Administrations, there remain legitimate questions regarding whether the United States’ actions under Article XXI are justiciable and even if justiciable  inconsistent with WTO obligations.  Further, even if both questions are answered in the affirmative, such an outcome would not necessarily result in the removal of Section 232 tariffs as the United States may choose to offer compensation or face retaliation by impacted trading partners.