By invoking national security clause, Donald Trump goes for
nuclear option in trade war
By Arvind Panagariya
A trade war is now in progress on two fronts. The United States opened the first front by
imposing a 25% tariff on steel imports and 10% tariff on aluminium imports from a large
number of its trading partners. That led many damaged parties to take retaliatory actions.
China was the first to respond with a 25% tariff on $3 billion worth of food imports from the
US. Mexico, Turkey, European Union and Canada followed suit once it became apparent
that the US would not grant them the exemption from tariff they had sought.
On the second front, the US has exclusively targeted China by slapping 25% tariff on a
wide variety of imports worth $34 billion from it. China hit back in this instance as well,
imposing 25% tariff on $34 billion worth of imports from the US. The US has threatened
China with 25% tariff on another $200 billion worth of imports. China has said it will
respond in kind.
Imposition of tariffs by members of the World Trade Organization (WTO) is not unusual.
The General Agreement on Tariffs and Trade (GATT), which governs goods trade among WTO members, contains numerous
“safeguard” provisions allowing member countries to raise tariffs under specified circumstances. What is unusual about these tariffs is
that they do not fall within the domain of any of these safeguard provisions.
Instead, the US has justified steel and aluminium tariffs under the rarely invoked GATT Article XXI, otherwise known as the national
security clause. It has not spelt out the GATT article under which it has imposed the tariffs targeting China, but with no other provision
applicable these too will have to be justified under the national security clause.
As it stands, each party engaged in the trade war has formally complained against the offending party in the WTO dispute settlement
body (DSB). The critical question facing DSB is how to approach the disputes involving the national security clause.
The relevant provision in this clause says, “Nothing in this Agreement shall be construed … to prevent any contracting party from taking
any action which it considers necessary for the protection of its essential security interests.” Accordingly, a member country may violate
any WTO rule if such violation is necessary to protect its national security interests.
More importantly, according to many leading legal scholars of the WTO, the member country has the sole right to decide what actions
are necessary to protect its national security interests. This means that actions under this clause are beyond review by the DSB. To
date, there have been very few disputes under this clause and not a single one of them has reached the review stage in the DSB or its
equivalent under GATT.
The dilemma the DSB faces is that if it allows a review, the US may simply walk out of WTO on the ground that such a review is
forbidden under the clause. At the same time, if US actions are allowed to stand without a review, it will signal to member countries that
anything is fair game so long as it is played under the national security clause. In either case, the multilateral trading system will be
seriously damaged.
The question then is whether the matter can be resolved through negotiations among the affected parties. Unfortunately, prospects for
this are not bright either. Both the key players in this conflict, the US and China, seem determined not to give ground.
nuclear option in trade war
By Arvind Panagariya
A trade war is now in progress on two fronts. The United States opened the first front by
imposing a 25% tariff on steel imports and 10% tariff on aluminium imports from a large
number of its trading partners. That led many damaged parties to take retaliatory actions.
China was the first to respond with a 25% tariff on $3 billion worth of food imports from the
US. Mexico, Turkey, European Union and Canada followed suit once it became apparent
that the US would not grant them the exemption from tariff they had sought.
On the second front, the US has exclusively targeted China by slapping 25% tariff on a
wide variety of imports worth $34 billion from it. China hit back in this instance as well,
imposing 25% tariff on $34 billion worth of imports from the US. The US has threatened
China with 25% tariff on another $200 billion worth of imports. China has said it will
respond in kind.
Imposition of tariffs by members of the World Trade Organization (WTO) is not unusual.
The General Agreement on Tariffs and Trade (GATT), which governs goods trade among WTO members, contains numerous
“safeguard” provisions allowing member countries to raise tariffs under specified circumstances. What is unusual about these tariffs is
that they do not fall within the domain of any of these safeguard provisions.
Instead, the US has justified steel and aluminium tariffs under the rarely invoked GATT Article XXI, otherwise known as the national
security clause. It has not spelt out the GATT article under which it has imposed the tariffs targeting China, but with no other provision
applicable these too will have to be justified under the national security clause.
As it stands, each party engaged in the trade war has formally complained against the offending party in the WTO dispute settlement
body (DSB). The critical question facing DSB is how to approach the disputes involving the national security clause.
The relevant provision in this clause says, “Nothing in this Agreement shall be construed … to prevent any contracting party from taking
any action which it considers necessary for the protection of its essential security interests.” Accordingly, a member country may violate
any WTO rule if such violation is necessary to protect its national security interests.
More importantly, according to many leading legal scholars of the WTO, the member country has the sole right to decide what actions
are necessary to protect its national security interests. This means that actions under this clause are beyond review by the DSB. To
date, there have been very few disputes under this clause and not a single one of them has reached the review stage in the DSB or its
equivalent under GATT.
The dilemma the DSB faces is that if it allows a review, the US may simply walk out of WTO on the ground that such a review is
forbidden under the clause. At the same time, if US actions are allowed to stand without a review, it will signal to member countries that
anything is fair game so long as it is played under the national security clause. In either case, the multilateral trading system will be
seriously damaged.
The question then is whether the matter can be resolved through negotiations among the affected parties. Unfortunately, prospects for
this are not bright either. Both the key players in this conflict, the US and China, seem determined not to give ground.
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