Photo: STR/AFP via Getty Images
A World Trade Organization (WTO) dispute panel ruled August 16 that China’s retaliatory tariffs, in response to duties on steel and aluminum imposed by the United States, are not consistent with WTO rules. This panel report, “China — Additional Duties on Certain Products from the United States” (DS558), is the latest in a series of panel reports related to the U.S. steel and aluminum tariffs imposed by the Trump administration in 2018 under Section 232 of the Trade Expansion Act of 1962. However, it is the first win for the United States, after losing four attempts to justify its steel and aluminum tariffs under the national security exception in the General Agreement on Tariffs and Trade (GATT) Article XXI(b) in December 2022.
The national security exception permits a member to take measures inconsistent with the GATT that it considers necessary for the protection of its essential security interests in times of emergency in international relations. This latest dispute, however, concerned the validity of China’s response to the Section 232 duties and brings a new dimension to a continuing debate about the scope and justiciability of the security exception. Additionally, it illustrates a variety of symptoms that the rules-based system is experiencing as a result of a nonfunctioning WTO Appellate Body.
Q1: What was the dispute about?
A1: Following the United States’ imposition of additional duties on steel and aluminum in 2018, China, along with the European Union, Mexico, Canada, and Turkey, challenged these measures at the WTO. In parallel, these countries imposed retaliatory duties on a range of U.S. products, arguing that the Section 232 tariffs were a safeguard measure under GATT Article XIX. Safeguard measures are temporary measures taken to prevent or remedy serious injury to the domestic industry as a result of imports of a particular good. They are an economic emergency exception because they restrict trade that would otherwise be allowed due to extraordinary economic circumstances. For that reason, members taking these measures should restore the balance of rights and obligations that exists under the GATT through appropriate compensation such as the suspension of substantially equal concessions or other obligations. Where they do not agree to provide appropriate compensation, an aggrieved member is entitled to unilaterally suspend concessions, as China is arguing it did through its retaliatory tariffs on U.S. products. However, the United States challenged these retaliatory tariffs, arguing that their steel and aluminum duties were not safeguard measures (Article XIX) but security measures (Article XXI) and therefore retaliation is unauthorized. Unlike safeguard measures, security measures do not authorize a member to rebalance the harm done to the aggrieved member.
Q2: What did the panel decide?
A2: The panel, in this case, agreed with the United States and rejected China’s argument that it was retaliating against a safeguard measure. It considered that the U.S. steel and aluminum tariffs were “sought, taken, or maintained pursuant to” the security exception and not the safeguards exception. Therefore, according to the safeguards agreement, the rules of the agreement including the ability to retaliate, do not apply to the U.S. action. The panel considered that “pursuant to” is an issue of applicability and not of conformity—therefore, the panel examined the design, goals, and expected operation of the measure but not whether the measure was in compliance with any other GATT provisions or not.
In short, the panel agreed that the design and legal basis of the steel and aluminum tariffs reflected national security objectives and therefore the United States’ measures were “sought, taken, or maintained pursuant to” the security exception and not a safeguard measure. As a result, China is not permitted to retaliate and its duties were in violation of GATT Article I, the obligation to extend any preferential treatment to all WTO members (also known as the most favored nation obligation) and GATT Article II, which states that members may not apply tariffs in excess of the rates negotiated in their schedule of concessions, the agreement that sets out the negotiated tariff bindings of a country.
Q3: What is the relevance of this dispute in the larger debate surrounding the WTO security exception?
A3: The proliferation of the United States’ use of the security exception has been controversial. For the first 70 years of its existence, this exception was rarely invoked by WTO members. They understood that it should be reserved for highly exceptional circumstances due to the lack of procedural safeguards in the provision. However, when the Trump administration came into office in 2017, this quickly changed. The United States started invoking the security exception to justify a variety of measures, including its steel and aluminum tariffs and origin marking requirements on goods coming from Hong Kong.
In parallel, the security exception was subject to WTO dispute settlement for the very first time in 2019, when Ukraine challenged Russia’s trade-restrictive measures in the context of the geopolitical conflict between the two countries. While Russia successfully justified its measures, the panel also set out a framework of analysis for measures taken under this exception for the first time. It made clear that while members have wide discretion when it comes to this provision, it is subject to review in WTO dispute settlement.
Following the U.S. imposition of additional duties on steel and aluminum, WTO panels determined in four separate disputes, including one brought by China, that these measures could not be justified under the security exception because they were not taken in time of an “emergency in international relations” as required by GATT Article XXI(b)(iii). Nevertheless, the United States has consistently rejected any adjudication or interpretation of the security exception by a WTO panel. Instead, it holds that security measures under Article XXI(b) are entirely within the discretion of a member and not subject to the jurisdiction of the WTO dispute settlement system.
Q4: What is the significance of this dispute in terms of the Appellate Body crisis?
A4: The WTO’s Appellate Body ceased functioning in December of 2019 after a continued refusal by the United States to agree to the appointment of any new members to the body since 2016. As a result, the Appellate Body has not been able to hear appeals, and a losing party to WTO dispute settlement can appeal a panel report into a legal limbo. When the appeal cannot be heard, the panel report cannot be adopted by the WTO dispute settlement body and therefore never enters into force. The United States has appealed every one of its lost panel reports related to the security exception into the legal void, including the report resulting from China’s challenge of the steel and aluminum tariffs.
The United States now finds itself on the other side of the table, a winner to the dispute on China’s retaliatory tariffs with a panel report that cannot be enforced. In a system that is designed around reciprocity, where one member does not abide by WTO rules, another is likely to do the same. If the United States is going to use its own interpretation of the security exception to justify its steel and aluminum tariffs, what is to stop another member from doing the same for other WTO rules? As shown by China’s creative interpretation of the safeguards agreement to justify its own duties, there is no mechanism to stop the People’s Republic of China, and other members will likely follow suit. Similarly, since the United States has appealed the panel report for its steel and aluminum dispute with China into the void, China is likely to do the same for this new report, thus giving the United States a taste of its own medicine. Both panel reports will stay in the legal void, and as a result the United States’ duties on steel and aluminum and China’s retaliatory duties will remain, ultimately harming U.S. and Chinese industries. By blocking appointments to the Appellate Body, the United States has paralyzed the dispute settlement system’s ability to enforce the multilateral trade rules, and WTO members can keep breaking the rules without consequence.
Q5: Will a win for the United States lead to a more favorable view of the Appellate Body?
A5: One of the reasons the United States cited for blocking the Appellate Body is that the appeals tribunal has consistently exceeded its mandate by engaging in authoritative interpretations of the WTO agreements and “adding or diminishing rights or obligations” of WTO members without their consent. The United States argued that this type of judicial activism has encroached on members’ sovereignty and ability to regulate in the public interest. These objections came before the first interpretation of the security exception, but the adjudication of this provision by the panels and consistent failed attempts by the United States to use this provision have only further fueled frustrations with the dispute settlement system.
In this case, it may seem contradictory that this panel is calling the U.S. steel and aluminum tariffs security measures when previous panels have consistently rejected the justification of these measures under the security exception. However, by adopting a narrow interpretation of Article XIX on safeguard measures just as it has done for Article XXI on the security exception, the panel is maintaining consistency and staying within its mandate by not adding to or diminishing the rights in the WTO agreements. While another panel has already determined that the U.S. steel and aluminum measures are not justified under the security exception, the panel on China’s tariffs is not assessing validity at all. Rather, it maintains a firm, albeit thin, line between whether the United States’ tariffs have been imposed “pursuant to” to the safeguards provision and whether the measure is “consistent with” the security exception. By applying the same rigorous and narrow interpretation of the rules to China’s measures as it has to the United States, the panel is holding both countries to the same standard. It is acting within its mandate, which should at the very least reflect positively on the WTO. Moreover, in light of larger U.S.-China trade issues, the United States is sure to be happy with a favorable outcome against China.
This newest panel report shows once more how precarious enforcement of WTO rules is without a functional dispute settlement system. However, the United States, the country that broke the system, is now forced to experience the frustration of a winning panel report that is appealed into the void. Perhaps it will inspire U.S. trade officials to work harder on reforming the system so that WTO law can be enforced. However, given the iron grip the United States has held on refusing adjudication of the security exception, it is more likely that nothing will change, and the system will remain hobbled and dysfunctional.
Emilie Kerstens is a research intern with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. William Reinsch holds the Scholl Chair in International Business at CSIS.
