WTO Decision Could Be Blueprint for NAFTA Investor Claims

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In a landmark ruling that could have significant implications for U.S. Section 232 tariffs on imports of steel and aluminum (and potentially autos), a World Trade Organization (WTO) Dispute Settlement Body Panel published a decision on April 5, 2019, holding that the national security exception in Art. XXI of the General Agreement on Tariffs and Trade (GATT) is not self-judging. Specifically, the panel found both the treaty and international law permitted the panel to inquire whether the party invoking the national security exception acted in good faith. While ruling in favor of Russia in a dispute with Ukraine, the panel rejected arguments made by Russia and the United States (via a third-party submission) that the national security exception in GATT was entirely “self-judging” and therefore not subject to substantive review.  While the panel’s decision is subject to appeal, Ukraine has announced it will not do so.  Therefore, the decision will stand.

This decision is significant because the Trump Administration has repeatedly invoked national security to justify its steel and aluminum tariffs. Those tariffs are presently subject to a number of challenges before the WTO’s Dispute Settlement Body, on the grounds that the tariffs were not actually imposed because of national security concerns. The following language from the panel’s decision in the Russia-Ukraine case is instructive:

The obligation of good faith requires that Members not use the exceptions in Article XXI as a means to circumvent their obligations under the GATT 1994. A glaring example of this would be where 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.

The panel’s decision may also have implications beyond the WTO. Since the national security exception provided in the North American Free Trade Agreement (NAFTA) uses very similar language to Art. XXI of GATT, one could imagine a Canadian or Mexican investor bringing a Chapter 11 claim against the steel and aluminum tariffs and challenging a national security defense as a manufactured pretext for imposing trade barriers that impair investor or investment rights. There is enough information in the public domain to frame a challenge suggesting national security was not the foremost consideration for imposing the tariffs. While not binding on a NAFTA tribunal, this WTO decision could certainly be used as persuasive evidence that the national security exception can be reviewed in a future investment claim against the United States regarding the steel and aluminum tariffs.

It should be emphasized, however, that the specific impact of this panel’s decision on the steel and aluminum tariffs remains uncertain.  Staffing issues at the WTO’s appellate level – caused in part by the United States – could lead to long delays in final determinations regarding the separate issue of the Trump Administration’s steel and aluminum tariffs.  Decisions by the WTO’s Dispute Settlement Body also do not constitute binding precedent like similar decisions in U.S. courts.

Reproduced with permission. A version of this alert was published April 17, 2019. Copyright 2019 The Bureau of National Affairs, Inc. 800-372- 1033. For further use, please visit http://www.bna.com/copyright-permission-request/