WTO Panel Sets Threshold Test for the National Security Exception

In April 2015, we posted the first of a pair of articles on the “national security exception”: an important and controversial part of WTO agreements and other trade agreements including NAFTA and the new CUSMA. In these articles, we explored whether it was a necessary “safety valve” or the “ultimate threat” to the rule of law in the context of international trade.

The issue was put in an urgent perspective in March 2018 when the U.S. Administration announced section 232 tariffs on steel and aluminium—measures justified on the basis of national security. See our “Pandora’s Box” series (Pt 1, Pt 2, Pt 3, Pt 4). A recent WTO panel decision has shone a global spotlight to the issue.

Russia – Traffic in Transit (“Traffic”) ^[1] is the first adopted WTO dispute settlement panel to interpret the GATT 1994 Article XXI national security exception. While U.S. section 232 tariffs have spurred numerous complaints and challenges at the WTO, this panel examined Russian measures.

Ukraine claimed that Russian measures requiring that it export shipments via designated check points rather than more direct routes and special marking requirements were inconsistent with GATT 1994 Article V (Freedom of Transit) and Russia’s WTO Accession Protocol. While Ukraine set out a clear prima facie case, Russia defended its measures as permitted pursuant to the GATT 1994 Article XXI (b) (iii) exception. Russia argued that the measures were taken at time of an “emergency in international relations.” Russia cited the tense situation in the region. Moreover, Russia took the position was that once it invoked the national security exception, the panel lacked jurisdiction to proceed.

Article XXI (b) concerns individual WTO members’ right to protect their essential security interests. It provided that:

Nothing in this Agreement shall be construed

[…]

(b) to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests

(i) relating to fissionable materials or the materials from which they are derived;

(ii) relating to 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;

(iii) taken in time of war or other emergency in international relations;

[…]

Subparagraph (b) has been long debated and is the subject of competing interpretations. In this case, United States set out its long-held position in support of Russia in a third-party submission. It argued that the phrase “it considers” phrase means that the Article XXI is entirely “self-judging,” and that it up to the member invoking it to determine which measures are necessary to protect its security interests. Such measures are not subject to review by a WTO panel.[2] In contrast, Canada argued that while each WTO member should be allowed to determine its own essential security interests, such a determination is subject to a good-faith requirement.[3]

The Traffic panel rejected both the Russian interpretation and the widely-held position that Article XXI (b) (iii) serves as “an incantation that shields a challenged measure from all scrutiny.”^[4] In rejecting the argument that it lacked jurisdiction to conduct an independent and objective review of the application of the exception, the panel found that Article XXI was not entirely self-judging.

The panel found that Article XXI had to be interpreted in light of the “… general object and purpose of the WTO Agreement, as well as of the GATT 1994.”^[5] This meant that panel had to find a balance between the need to “‘promote the security and predictability of the reciprocal and mutually advantageous arrangements and the substantial reduction of tariffs and other barriers to trade”, and the need to permit members to “depart from their GATT and WTO obligations in order to protect other non-trade interests.” Article XXI (b)(iii) was one of the many “exceptions and escape clauses built into the GATT 1994 and the WTO Agreements” which provide WTO members with:

… a degree of autonomy to adopt measures that are otherwise incompatible with their WTO obligations, in order to achieve particular non-trade legitimate objectives, provided such measures are not used merely as an excuse to circumvent their GATT and WTO obligations … It would be entirely contrary to the security and predictability of the multilateral trading system established by the GATT 1994 and the WTO Agreements, including the concessions that allow for departures from obligations in specific circumstances, to interpret Article XXI as an outright potestative condition, subjecting the existence of a Member’s GATT and WTO obligations to a mere expression of the unilateral will of that Member.^[6]

In determining that Russia had to meet an objective threshold as to as the elements of Article XXI (b), the panel also applied an “obligation of good faith … a general principle of law and a principle of general international law.”^[7] This would preclude WTO members from resorting to the exception in order to circumvent their WTO obligations, either by labelling as “[their] essential security interests” economic interests that they agreed to pursue and promote in accordance with WTO rules or by claiming that measures unrelated or remotely related to the security interests they declare to be protecting are measures taken “for the protection of” these interests.

Therefore Russia had to show that its Article XXI defense met an objective threshold and justify the “essential security interest” in relation to the “quintessential functions of the state” that its measure is seeking to protect. Russia was also required to demonstrate that the measure was not “too remote” but had a connection to the essential security interests it declares to protect so that they can plausibly be asserted to have been taken “for the protection of” these interests and “… not … implausible as measures protective of these interests.”^[8]

The panel reviewed each element of Russia’s Article XXI (b) defense. It found that the situation in the region was “… very close to the ‘hard core’ of war or armed conflict …” and that the situation between Russia and Ukraine did rise to the level of an emergency in international relations.^[9] It also determined that Russia had taken its measures “in time of” this emergency as they had been taken during the time in which this situation was actively being the subject of multilateral concern and bilateral sanctions.^[10] Russia had met the test of articulating before the panel the essential security interests that its measure seeks to protect, “sufficiently enough to demonstrate their veracity.”^[11] In terms of the “good faith” requirement, the panel found that Russia’s use of the exception was not intended to circumvent its GATT obligations, and Russia had met the test of connecting its measures to its essential security interests “sufficiently enough to demonstrate their veracity.”^[12] The panel concluded that there was “nothing in Russia’s expression of those interests to suggest that Russia invoke[d] Article XXI (b) (iii) simply as a means to circumvent its obligations under the GATT 1994.”^[13]

The Traffic ruling has important implications. The panel’s rejection of long-held U.S. interpretation is significant in that the United States has invoked Article XXI in the ongoing series of WTO disputes arising from its section steel and aluminum tariffs. In the broader context, the finding may fuel ongoing U.S. angst about binding dispute settlement in the WTO and in other international trade agreements. In our next article, we will examine this in more detail.

In Traffic, the panel set out threshold tests for the use of the national security exception. The panel ruled that Article XXI (b) set out “limitative qualifying clauses,” which “qualify and limit the exercise of the discretion accorded to Members”[14] which are “… amenable to objective determination’.”^[15] Once Russia’s measures were deemed to have been taken in time of emergency in international relations and to be sufficiently related to Russia’s essential security interests, it was “for Russia to determine the ‘necessity’ of the measures for the protection of its essential security interests.”^[16]

This “threshold” approach differs from the approach that is followed at the WTO when the application of one of the general exceptions is reviewed. In these cases, the “necessity” of measure is subject to detailed and extensive independent review. In order to succeed with an Article XXI (b) a party must demonstrate essential security interests that its measures seek to protect, “sufficiently enough to demonstrate their veracity.”^[17] The Traffic panel found Russia’s national security defense was “minimally satisfactory.”^[18]

Adopted reports are not binding precedent for subsequent panels, although they are followed. At this point, given the ongoing stalemate with respect the appointment of WTO Appellate Body members it is far from certain that an appeal of the panel finding will take place any time soon.

However, for now, the ruling has provided a potential framework for the review of future cases including the ongoing section 232 challenges at the WTO. In the Canadian context, the issue remains of great importance. The new Canada-United-States-Mexico Agreement (CUSMA) includes a national security exception, and in our follow-up article we will examine CUSMA Article 32.2 “Essential Security” exception in the light of this WTO panel determination.

____________________________

[1] Panel Report, Russia – Measures Concerning Traffic in Transit, adopted 26 Apr. 2019 (WT/DS512/R)

[2]Ibid., Annex D-10

[3] Ibid., Annex D-3

[4] Ibid., para. 7.100

[5] Ibid., para. 7.79

[6] Ibid., para. 7.79

[7] Ibid., para. 7.132

[8] Ibid., para. 7.138

[9] Ibid., para. 7.122

[10] Ibid., paras 7.124–7.125

[11] Ibid., para. 7.134

[12] Ibid., para. 7.134

[13] Ibid., para. 7.137

[14] Ibid., para. 7.65

[15] Ibid., para. 7.71

[16] Ibid., para. 7.146

[17] Ibid., para. 7.134

[18] Ibid., para. 7.137