Trade and national security risks

By Doug Beazley April 23, 201823 April 2018

Trade and national security risks

 

It’s a measure of just how unsettled things have gotten in the realm of international trade law commentary: the experts have started quoting Frank Zappa.

A quip attributed to the late gonzo rock star — “You can't be a real country unless you have a beer and an airline” — has been making the rounds in emails exchanged by trade lawyers. It’s a gag, of course, but it also reads as a better-phrased version of the justification U.S. President Donald Trump offered for his decision to cite a threat to national security to justify massive new tariffs on imports of steel and aluminium.

“Our steel industry is in bad shape,” Trump tweeted on March 2, before mashing the all-caps key. “IF YOU DON’T HAVE STEEL, YOU DON’T HAVE A COUNTRY!”

Trump has been president of the United States for over a year now, and in that time he has trampled any number of the political norms that serve as the unwritten laws of western democracy — in how he approaches party politics, gender and race relations, diplomacy and the rule of law, to list just the obvious examples.

But his approach to trade — to tariffs, especially — could end up being the broken mirror that brings the world something worse than seven years of bad luck. Trump’s burgeoning tariff war with China is, while risky, still a recognizable trade strategy. International trade and competition lawyers understand trade wars; they are, to them, predictably unpredictable. And they end, eventually.

The package of steel and aluminum tariffs Trump announced in early March is a different animal entirely. By deploying an obscure clause in a seldom-used American law — the 1962 Trade Expansion Act, which gives the president unilateral power to act to restrict trade that threatens “national security” — Trump aimed a body-blow at the entire structure of global rules-based trade. The damage done could long outlast his time in office.

“This administration reacts emotionally in setting its policy. I never took the national security rationale as anything but concocted,” says Sandy Walker, a competition law and foreign investment review specialist at Dentons Canada. “Once national security is used as an excuse to erect trade barriers, it can quickly break down the liberal world trading order.”

“It seems like the post-war rules are coming unglued.”

Trump ordered the tariffs on the basis of a U.S. Department of Commerce investigation directed by Commerce Secretary Wilbur Ross — himself a longtime investor in ailing manufacturing and steel concerns — which concluded that imports of cheap metals were undermining the American steel sector’s capacity to tool up for wartime production.

It was an odd argument to make, since the purported target — China — has seen its exports of steel and aluminum to the United States curbed in recent years by the aggressive use of anti-dumping orders. The primary sources of foreign steel and aluminum in the U.S. are close American allies like Canada, which are already wired into U.S. supply chains.

“To suggest that that U.S. national security is threatened because of steel imports stretches credulity past the breaking point — especially given that the U.S. steel industry devotes only two per cent of its output to defence and the majority of imports come from Canada and other close allies,” says Milos Barutciski, head of the international trade practice at Bennett Jones in Toronto.

Trump himself gave the game away on the real reason for the tariffs almost immediately. Less than a week after announcing global tariffs, he granted exemptions to Canada and Mexico — then suggested the exemptions were conditional and tied to progess in the NAFTA talks. If the point of the tariffs was to preserve the ability of the American metals sector to support the military, there was no need to grant exemptions to NAFTA nations.

So the tariffs were intended as leverage — “economic blackmail,” in the words of Unifor union president Jerry Dias.

While the law Trump used to impose the tariffs is over five decades old, few U.S. presidents have used it the way he has. As of a year ago, the Trade Expansion Act had been used for national security probes of imports just 26 times since 1962; in only a handful of cases — all related to petroleum imports — did Commerce conclude that the imports undermined national security.

In the eye of the beholder

The concept of a national security exception is at least as old as the post-war global trading order itself. It was part of the original 1947 General Agreement on Tariffs and Trade — the GATT, the agreement that forms the bedrock of the world’s trading system.

Even as the GATT was being negotiated, the blanket Article XXI permitting a GATT member to invoke trade restrictions whenever “it considers” such an action to be “necessary for the protection of its essential security interests” was controversial. Even the U.S. delegation, which drafted the security exception, voiced the worry that it introduced “a great danger of having too wide an exception … that would permit anything under the sun.”

Its first real test came as the Allies were still picking up the pieces after the Second World War. The Marshall Plan — a $13 billion aid program launched by the United States to rebuild Western Europe’s industrial capacity and keep it from falling under the dominance of the Soviet Union — featured an export control program meant to prevent products with military uses from ending up in nations under Soviet control. Czechoslovakia challenged that program through the GATT, arguing that if Article XXI wasn’t interpreted narrowly, “practically everything might be a possible element of war,” a reading the Czechs said threatened to “change the face of civilization.”

A 1949 GATT council voted overwhelmingly against referring the U.S.-Czech dispute to a panel. The British delegate summed up what would be the consensus on the national security exception for decades to come: “… the United States’ action would seem to be justified because every country must have the last resort on questions relating to its own security.”

The exception was tested again in 1982, when Argentina invaded and occupied the Falkland Islands, British-dependent territories in the South Atlantic. In May of that year, Canada joined the European Community (precursor of the European Union) and Australia in imposing a trade embargo on Argentina in an attempt to pressure it into quitting the Falklands. The Argentines — at the time struggling with a debt crisis — challenged the embargo under Article XXI, arguing that it could not be justified since its territorial dispute was with the United Kingdom only.

The GATT council met in May 1982 to address Argentina’s complaint. Twenty GATT countries concluded that the embargo was a legitimate exercise of states’ rights; another six called for a GATT review and eleven chose not to invoke GATT authority over it. Again, the verdict was clear: if a GATT nation says a particular trading activity threatens its security, it does — case closed. Brazil’s warning at the time — that an open-ended interpretation of XXI “could set a dangerous precedent” — was ignored.

And that verdict has held ever since. “In over sixty years of international trade,” wrote law professor Roger P. Alford in a 2011 paper on the security exemption, “invocations of the security exemption have only been challenged a handful of times, and those challenges have never resulted in a binding GATT/WTO decision.”

The United States continued to take the lead in testing the security exception’s limits. The Reagan administration used Article XXI in 1985 to justify a trade embargo on Nicaragua — a nation that, arguably, posed no credible security threat to the U.S. at all. When Nicaragua complained to the GATT Council, a GATT panel was convened. In its final report, the panel punted — conceding that invoking XXI was a member state’s right but taking issue with the argument that XXI cases are immune to judicial review, and calling for a “formal interpretation” of XXI at some point down the road. (The U.S. ended up blocking the adoption of the panel report anyway — something countries can no longer do unilaterally under the World Trade Organization.)

When the UN and the European Community started ramping up a sweeping trade embargo on Yugoslavia in the early 1990s, in an attempt to force an end to a bloody regional war between the former Soviet bloc nation and its breakaway republics, Yugoslavia took its complaint to the GATT council. This time, the target of the embargo acknowledged at the start that it could be justified under XXI; Yugoslavia called on the GATT council to re-evaluate the imposition of “punitive trade measures for non-economic reasons.”

When the GATT council sat down to debate the embargo in March, 1992, it didn’t even touch on the perennial question of whether XXI is self-judging; instead, it focused on whether a GATT panel process would disrupt peace talks. (The whole case was suspended when Yugoslavia dissolved shortly thereafter.)

A blunt instrument

At this point in the history, the self-judging national security exemption was firmly established in international trade law — and pretty much bulletproof. But why would any international trading system want to include a clause that allows its members to impose tariffs and embargos at will, without seeking the agreement of trading partners — or even bothering to make much of a case at all?

In statecraft, guns typically come before bread. No nation is likely to enter any trading relationship that constrains its ability to keep its enemies at a distance, or surrender that ability to any outside authority. The WTO — which took over from the GATT in 1995 and adopted the national security exception — accepted 25 new members between its inception and 2011. All 25 of them signed on to the Article XXI security exception.

The reasons for that have to do with those unwritten norms of Western governance that Trump keeps stepping on. The most remarkable thing about the national security exception is how rarely it’s been used. Partly that’s a matter of prestige: any nation invoking national security to impose trade barriers for frivolous reasons is likely to see its standing among its international peers drop suddenly.

“I call it the ‘red-faced’ test,” says Michael Hart, emeritus professor at the Norman Patterson School of International Affairs at Carleton University. He points to the mockery Sweden endured after it invoked GATT Article XXI in 1975 to justify a global import restriction on certain types of footwear.

“The Swedes argued that the clause applied, because armies march on their feet, don’t they?” says Hart. “It’s up to the state to define national security, so the only limit on it is how ridiculous the state seems to outsiders.

“Trump is apparently immune to that effect.”

But the real reason why the national security exception is invoked so rarely has less to do with shame, and everything to do with self-interest. The exception is the ‘nuclear option’ in international trade law. Nuclear weapons keep the peace because the threat of their use is more powerful strategically then their actual use would be tactically. Once their battlefield use ceases to be unthinkable, their utility as a deterrent fades away.

The national security exemption has a tactical use — which is why it’s been used far more often than nuclear weapons. But if the exception becomes a blunt instrument for protectionist politicians — once trading nations see it being used that way by the United States, the nation that acted as the architect and guarantor of the international rules-based trading system for decades — the taboo against using it in the pursuit of narrow economic goals is shattered.

“There was an unspoken acknowledgement that it would be folly to use it under the guise of self-defined national security,” says Lawrence Herman, trade counsel at Herman and Associates and a senior fellow at the C.D. Howe Institute. “Once one country does so, it greatly increases the temptation for other countries to do the same, citing the same reason.”

It’s hard to overestimate the potential for blowback. Every trading nation has domestic sectors it wants to protect from foreign competition. The thing holding them back — the thing that prevents India, for example, from declaring its critical agriculture sector a component of national security — is the red line on the security exception the Trump administration has effectively erased.

“It’s a dumb move,” says Barutciski, “and the U.S. will likely lose when it’s eventually litigated before the WTO. And if for some reason the U.S. should win that challenge, it loses even worse because it will have given every other country on the planet a wide-open pretext for protectionism against both goods and services.

“The U.S. is the biggest exporter of services on the planet. It maintains a large global trade surplus in services. Goods represent a diminishing share of the U.S. economy. So if Trump wins, he loses.”

Challenging the WTO may be the Trump administration’s goal. The central stated aim of the Trade Policy Agenda it delivered to Congress in early March 2017 is asserting “U.S. national sovereignty over trade policy” — in other words, repudiating the WTO’s ability to adjudicate trade actions and settling the United States’ trade grievances outside of the WTO system.

That’s a path that leads to a weaker WTO. Could it also lead to the WTO’s collapse?

“We could be entering a period where the rules of trade no longer function,” says Herman. “We’re on the precipice now.”

“Trump wants to weaken the WTO,” says Simon Potter of McCarthy Tétrault LLP, a specialist in trade law and commercial litigation. “He wants a world in which there are different customs rates for individual nations on the basis of whether they are, quote-unquote, ‘nice’ to the United States.

“This is the beginning of a global confrontation with those people in power who would prefer a world without rules.”

Barutciski is more sanguine about the WTO’s chances of outliving Trump — mainly because the days when the U.S. could set the world’s trading rules by fiat are long gone. Other WTO nations for whom the U.S. is not the largest trading partner, he says, will act to save the institution out of self-interest.

“The United States is a big player, but it’s no longer the only one,” he says. “Its economic role is shrinking relative to the total size of the global economy. And many of the U.S.’s WTO commitments were implemented through legislation. Trump can’t dismantle those without Congress.

“Trump’s actions could set the global economy back a decade or more. But cooler heads will eventually prevail.”

One of the ironies in all of this is that, by deploying national security to defend the indefensible, President Trump has undermined American national security by signaling to the world that the rules only apply as long as the president finds them convenient, or until he changes his mind. Which he does — often.

Trump imposed the sweeping steel and aluminum tariffs — then offered exemptions — before starting a tariff war with China, alienating allies just at the point where he might need their help. And a lasting agreement on North Korea’s nuclear program likely can’t be achieved without China’s assistance.

One of Trump’s first acts in office was to pull the U.S. from the Trans-Pacific Partnership, a multilateral trade agreement intended to eventually get China to play by the rules of international trade. Then, in early April, he signaled his interest in joining the TPP. Days later he’d changed his mind again, tweeting that the deal involved “too many contingencies.”

“Basically,” says Hart, “to assume there’s anything like an overall strategy at work here would be a bit of a stretch.”

That sort of waffling taints everything a nation does in the world, including negotiations on national security. Nobody wants to negotiate a security pact with a country led by someone whose policies change direction with the wind. An unreliable trading partner is an unreliable ally. National security and trade are two sides of the same coin.

“Economic policy is just one lever countries use to deal with each other. Nation to nation relationships are multifaceted,” says Subrata Bhattacharjee, a partner at BLG in Toronto who practices competition and foreign investment law.

“There is a reason they’re called ‘trade wars’.”

So what can Canada do about all this? It’s a middle power, politically and economically; multilateral agreements enhance our clout. Without them to rely on, Canada is left to fall back on influence and moral suasion. But that doesn’t make it powerless.

The United States is not a political monolith, no matter what the president says. During the NAFTA negotiations, Canada’s negotiating team reached out to business organizations and congressional representatives of U.S. states that have prospered under the current trade agreement — extending its influence outside of the White House, much as Trump wants to extend the presidency’s influence outside of the WTO.

Potter says Canada needs to take the same approach to Trump’s challenge of the WTO — to reach out to our other trading partners, to avoid punishing them with defensive tariffs of our own, and to constantly make the argument for open, global trade.

“This was all predictable,” he says. “Canada, like countries around the world, has always depended on the U.S. to be the country that defended the rules-based system.

“So now we have to abandon our complacency. We have to take a global leadership role. We have to be the people who make the case for a rules-based system.

“And we have to reach out to our friends around the world. Do Canada and the EU really want to protect themselves from each other? We have to stay true to our principles.”

Doug Beazley is a regular contributor based in Ottawa.

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