Will the National Security Exception Undermine the World Trading System? 

Trade and industrial policy actions, taken under the cover of national security exceptions to liberal trade commitments, are proliferating across the globe. If left unchecked, these actions have the potential to undermine the multilateral trading system. But if handled appropriately, they provide a reminder of the core purpose and function of multilateral trade rules.   

National security arguments for trade protection are not new. Such arguments have long been one of the few universally acknowledged exceptions to the case for free trade. And deciding how to accommodate these exceptions in a liberal trade order was a major preoccupation of the international conventions that ultimately created the General Agreement on Tariffs and Trade (GATT) in 1947, the precursor to the World Trade Organization (WTO) created in 1995 that today serves as the constitution for the world trading system.   

But never have these exceptions been invoked with such frequency as they are today. National security is referenced, for example, in WTO dispute settlement cases ranging from Ukraine's 2016 case against Russia on measures concerning traffic in transit (DS512), to Qatar's 2017 and 2018 cases against the United Arab Emirates and Saudi Arabia on measures relating to trade in goods and services and trade-related aspects of intellectual property rights (DS526 and DS567), to the EU's 2018 case against the United States on certain measures on steel and aluminum products (DS548), to Hong Kong's 2020 case against the United States on origin marking requirements (DS597) and China's 2022 case against the United States relating to measures on certain semiconductor and other products and related services and technologies (DS615), to name a few. What accounts for this development? 

Trade wars and industrial policy

One reason for the proliferation of trade and industrial policy actions in the name of national security may be related to the greater credibility of these exceptions when important WTO members are engaged in cold/hot war, together with the microchip's "dual use" property and its ubiquity as an input in the digital age.  

The credibility of national security exceptions today can be compared to the GATT era, when most GATT members were on the same side of the cold war and the large GATT member economies were military allies.   

In that era, the trade actions of GATT members that were taken for national security reasons typically did not require exceptions to GATT commitments, because the targets of those actions were not GATT members, a feature that clearly no longer holds for WTO members today.  

The ubiquity of the dual-use argument as it relates to national security concerns associated with the microchip can also be compared to an earlier era, when such arguments were thought to apply to relatively narrow product categories such as fissionable material that could be used for generating power but also nuclear weapons, or ammonia that could be used for fertilizer but also chemical weapons.  

Another reason for the increasing prevalence of trade and industrial policy actions taken under the national security exception may be the expanded reach of national security arguments due to the rise of offshoring.  

Forty years ago, a simple tariff on the final product of an industry deemed critical to national security might pass for industrial policy, due to the technological and legal hurdles that could be counted on to provide natural trade protections all the way up the supply chain.   

But now the global factory floor model of production that has been made possible with the dramatic fall in trade costs around the world requires that every link in the global supply chain of a critical industry be examined for possible "reshoring."   

So where once a single protective action might suffice, now a suite of trade and industrial policies may be required to achieve the same national security goal, as is evidenced for example in President Joe Biden’s 2021 Executive Order on securing America’s supply chains. This can apply to arguments for the imposition of import protection, and it can apply to arguments for the imposition of export restrictions.  

For these reasons, one might expect trade and industrial policy actions that invoke the national security exception to be proliferating, and this by itself would pose a challenge to the world trading system. But there is an additional reason that this challenge is especially thorny: A compelling argument can be made that, when it comes to a country's national security interests, the existential nature of these interests means that only the country itself has the sovereign right to define them, and for this reason exceptions to a country’s international trade commitments on national security grounds should be "self-judging." Indeed, the United States feels sufficiently strongly on this point that it considers it a “red line issue” in its ongoing refusal to allow the appointment of WTO Appellate Body judges.   

Violation vs "non violation" claim 

On its face, the argument that national security exceptions in the context of GATT/WTO commitments should be self-judging raises the specter that a wide loophole could be opened in GATT/WTO disciplines, allowing any country to go unchallenged in invoking national security exceptions for any reason that it sees fit, protectionist or otherwise, a prospect that could undermine the multilateral trading system.   

But crucially, this argument does not imply that such exceptions should be allowed to be invoked on a unilateral basis. Rather, the argument is that, while a country should not face the possibility of being found in violation of its WTO commitments when it invokes the national security exception to introduce new trade restrictions, the country should nevertheless accept the prospect of reciprocal trade actions by its impacted trading partners that serve to “rebalance” its WTO market access commitments in light of the country’s new trade restrictions, a prospect that arises under the so-called non-violation nullification and impairment provisions of the GATT/WTO.   

The distinction between a “violation claim” and a “non-violation claim” is critical here. A violation claim, say against the United States, asks the WTO to rule that the national security exception was improperly used, whereas a non-violation claim, if successful, simply allows the country in question to take reciprocal retaliatory measures against the United States although the US measures (taken on national security grounds) did not violate WTO rules.   

Hence, distinct from a violation claim against a national security exception, the purpose of a non-violation claim would not be to request a review of the legitimacy of the exception, but rather would be to simply restore -- to the level that existed prior to the exception -- the balance of concessions between the country invoking the exception and its trading partners. And the argument is that, in facilitating this rebalancing without second-guessing intent, the non-violation claim has a special role to play in the context of national security exceptions invoked by a WTO member government.     

This is the (unsuccessful) argument that the United States made at the WTO in the context of its steel tariffs, and it is an argument that the United States Trade Representative Katherine Tai has recently reiterated, writing “From the beginning of the trading system, it has been the U.S. view that the appropriate remedy where a Member is impacted by another Member's essential security measures is to seek a non-violation / nullification or impairment claim. The reality is we designed a WTO where rebalancing could take place without interfering with a Member's sovereign responsibilities in the area of national security.”   

Policy implications

More generally, as economic research on the design of trade agreements indicates, to handle the international externalities that governments impose on each other as they devise their own trade and industrial policies, the core purpose and function of multilateral rules that discipline these policy choices should always be the same: to allow countries to make their own policy choices while preventing those choices from being driven by the ability to shift some of the costs of their choices onto others.   

This is in essence what the GATT/WTO’s non-violation clause and its rebalancing provision is meant to ensure within the context of the national security exception. And according to the logic of this research, if the United States wished to maintain the Trump steel tariffs for national security purposes even after the rebalancing by US trading partners afforded by a successful non-violation claim had occurred, then the United States should be allowed to do just that.    

It is in this sense that, if left unchecked, the proliferating arguments for national security exceptions to WTO commitments have the potential to undermine the multilateral trading system, while if handled appropriately they present a reminder of the core purpose and function of multilateral trade rules.  

The policy implications are clear. As a possible reform of its dispute settlement procedures, the WTO membership should consider carving out trade actions taken under the national security exception (GATT Article XXI) as a case where trading partners have the right to bring non-violation claims but do not have the right to bring violation claims. 

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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