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30 March 2018
The US Commerce Department recently issued Section 232 national security investigation reports on steel and aluminium (for further details please see "Commerce Department issues Section 232 national security investigation reports on steel and aluminium"). On March 8 2018 the president signed proclamations imposing duties of 25% on steel imports and 10% on aluminium imports, which will enter into force on March 23 2018.
To counter protests from US allies that the measures do not threaten US security, the proclamations state that:
"Any country with which we have a security relationship is welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports from that country. Should the United States and any such country arrive at a satisfactory alternative means to address the threat to the national security such that I determine that imports from that country no longer threaten to impair the national security, I may remove or modify the restriction on steel/aluminum articles imports from that country and, if necessary, make any corresponding adjustments to the tariff as it applies to other countries as our national security interests require."
However, the proclamations immediately exempt imports from Canada and Mexico as a 'special case'. It is suggested that the exemption will be terminated if the North American Free Trade Agreement (NAFTA) negotiations do not provide an alternative solution to the national security concerns.
The European Union has rejected the US claim that these measures are necessary or even intended to address a national security concern. The European Union has announced the following three actions in response to the measures:
The European Union has also requested an exemption from the US measures since it considers that its security and trade relationship with the United States is as important as that of Canada and Mexico. However, the United States has thus far not indicated what precise criteria it will apply or what procedure it will follow in deciding on exemptions.
WTO dispute settlement
The European Union takes the view that the kind of action taken by the United States comes within the scope of the WTO Safeguards Agreement and must satisfy the agreement's conditions. The agreement allows the imposition of temporary supplemental duties where an investigation demonstrates that a product is being imported in such increased quantities, absolute or relative to domestic production, and under such conditions as to cause or threaten to cause serious injury to the domestic industry that produces like or directly competitive products. In principle, these increased imports must be due to unforeseen circumstances.
The European Union considers that the United States has not satisfied the various conditions of the agreement and that the proclamations therefore constitute violations of the agreement.
The European Union, together with an alliance of seven other WTO members, successfully brought a WTO dispute settlement case against the George W Bush safeguard measures on steel products in 2002-2003. The case was adjudicated within 18 months and the measures were withdrawn by the United States under threat of WTO sanctioned trade retaliation from the European Union, among others.
The United States does not claim that its measures are justified by the agreement, but relies on the national security exception in Article XXI(b)(iii) of the General Agreement on Tariffs and Trade (GATT):
"Nothing in this Agreement shall be construed… to prevent any contracting party from taking any action which it considers necessary for the protection of its essential security interests… taken in time of war or other emergency in international relations."
While the traditional US view has been that this provision is self-judging and its invocation is not subject to dispute settlement, the EU view, at least since the conclusion of the WTO Safeguards Agreement, has been that any action taken based on the provision must be justified in accordance with its terms. The two crossed swords on the matter in the Helms Burton dispute in 1996. While a WTO dispute settlement case is likely to be brought by a number of countries, the prospect of a speedy solution is less promising than in 2002 because the United States is blocking the appointment of new members of the WTO appellate body and impeding the functioning of the system.
Rebalancing action under Article 8
Further, the European Union takes the view that since the US measures come within the scope of the WTO Safeguards Agreement, it is entitled to apply a special remedy that does not require recourse to dispute settlement.
Article 8(1) of the agreement requires a country wishing to impose a safeguard measure, on request of any affected members, to enter into consultations to offer "adequate means of trade compensation for the adverse effects of the measure" on the trade of the other members. If no agreement is reached within 30 days, the affected exporting members can suspend, on 30 days' written notice, "the application of substantially equivalent concessions or other obligations under GATT 1994, to the trade of the Member applying the safeguard measure".
Article 8(3) provides that such action cannot be taken for three years where the safeguard measure has been imposed not in response to an absolute increase but merely a relative increase in imports (ie, an increase in market share in a deceasing market).
The advantage of this course of action is that if the United States disapproves it would need to take dispute settlement action against the rebalancing action. For that to be effective, it would need a functioning WTO dispute settlement system.
The US president has threatened to retaliate by imposing duties on EU automobile exports, but this would be a blatant violation of the agreement which prohibits unauthorised retaliation without recourse to dispute settlement (Article 22.1 of the Dispute Settlement Understanding).
Initiation of safeguard proceedings
An additional concern of the European Union is that the excess steel production will be diverted from the US market and be imported into the European Union exacerbating the already delicate state of the industry. To protect against this, the European Union is preparing to start an investigation with a view to adopting its own, presumably legal, safeguard measures. It remains to be seen whether all of the conditions of the WTO Safeguards Agreement will be demonstrated as satisfied by the EU investigation. One interesting question will be whether the illegal US action could be considered as an unforeseen circumstance.
The situation is reminiscent of the earlier steel crisis in 2002 when the US safeguard action prompted similar action around the world, including by the European Union.
Legality of exemptions
Naturally, every country is eager to obtain an exemption from the US measures and the European Union is no exception. However, these exemptions pose an additional problem. The GATT contains a general most-favoured nation obligation (the most-favoured-nation (MFN) principle) which demands that:
"any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties."
The national security exception in Article XXI of the GATT can also justify a departure from the MFN principle. However, countries that do not benefit from an exemption will be likely to argue that the difference in treatment must be justified by objective differences relating to security – and not by trade concerns.
The WTO has avoided ruling on the MFN issue arising out of exemptions in earlier safeguard cases by holding them inconsistent with the WTO because of a breach of the principle of parallelism that it has developed. This requires exports from exempted countries to be excluded from the assessment of the need for the measures.
For further information on this topic please contact Lode Van Den Hende or Eric White at Herbert Smith Freehills LLP by telephone (+32 2 511 74 50) or email (email@example.com or firstname.lastname@example.org). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.
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Lode Van Den Hende