US-China Tariff War: A Lesson about WTO Law

The US first written submission in the Section 301 case (DS543) is an eye-opening read. To me, the ingenious arguments advanced by the USTR, no matter how far-fetched they may seem in places, raise some interesting questions and teach a valuable lesson about WTO law. 

I. A brief analysis of the legal situation

1. The US imposed an extra 25% of import tariffs on a total of $50 billion worth of Chinese products in 2018. These levies were justified on the grounds of three findings under Section 301: (i) China has forced American firms to transfer technology, (ii) China has acquired American technology through state-facilitated acquisitions of American firms in the US territory, and (iii) China has committed cyber theft of US technology. Regardless of the merits of the justifications cited, the US extra tariffs on Chinese products violate GATT articles I (MFN) and II (tariff bindings). To the extent that forced technology transfer is prohibited under China’s Accession Protocol, the US unilateral action is also inconsistent with DSU article 23 (no resort to unilateral retaliation on matters covered by WTO).
   
   
2. China promptly brought DS543, rightly asserting the legal claims under GATT I & II and DSU 23. However, China also promptly retaliated against the US by imposing 25% import tariffs on $50 billion worth of US products. Like the United States, China’s unilateral tariffs violate GATT articles I and II. Unlike the United States, China’s unilateral tariffs, in its entirety, violate DSU article 23 (see below). China cited unspecified “international law principles” to justify its unilateral action.
   
   
3. In defending its case in DS543, the US submission has advanced two major arguments. First, it claims that, because China has already taken the matter in its own hands by imposing retaliatory tariffs, China’s pursuit of this dispute constitutes “a misuse” of the WTO dispute settlement system. In support of this claim, the US submission cites “nine separate principles” of WTO dispute settlement, ranging from the objectives of the dispute settlement mechanism to “good faith”. The US claim raises an interesting question: Can a member lose its right to resort to WTO dispute settlement if it has taken unilateral action to address the same matter? In other words, is the member’s right to have recourse to WTO dispute settlement conditioned upon its compliance with the requirements of DSU Article 23?  In this vein, the US further argues that the fact that both the US and China have resorted to unilateral actions indicates that “a settlement of the matter among the parties to the dispute has been found” within the meaning of DSU article 7, and, accordingly, the Panel report should be “confined to a brief description of the case” and stating that “a solution has been reached” as instructed by DSU 7. It seems ridiculous to call an ongoing and escalating tariff war “a settlement of the matter” between the two countries. However, what if the two countries reach some kind of truce (as they did between December 1, 2018 and May 4, 2019) or even a formal agreement but do not eliminate all the extra tariffs? Is that a “settlement” within the meaning of DSU Article 7?   
   
   
4. The second major argument advanced by the US is its invocation of the public morals exception under GATT Article XX(a). I suspect this defense will fail, since it is not difficult to suggest reasonably available alternatives that are less trade-restrictive than unilateral tariffs. For instance, a ban on Chinese acquisition of high-tech companies in the US territory, and targeted countermeasures in cyberspace, would all be less trade restrictive and more effective in addressing the underlying US concerns about IP loss.
   
   
5. The US could sue China on its retaliatory tariffs for violation of GATT I and II. In that event, China might invoke GATT XXI(b)(iii) as defense. That is, China may “consider” the massive US tariffs as a threat to its “essential security interests” and its retaliatory tariffs “necessary” for the protection of such interests and taken in time of an “emergency in international relations.” Given the US current position on the national security exception, it might not wish to take this route.

II. A counterfactual: What if China had not retaliated unilaterally?

Let’s imagine that upon US declaration of its unilateral tariffs, China responded by bringing DS543, but had not imposed any retaliatory tariffs. What would the situation be today?

1. In DS543, the US would not have available the arguments that China misuses the WTO dispute settlement system and that the dispute has been effectively taken out of the WTO.
   
   
2. The US would still invoke the public morals exception as defense. But this defense is likely to fail. At that time, China could seek DSB authorization for retaliatory tariffs – probably in the year of 2020 – and the US would not be able to retaliate against China’s DSB-authorized retaliation, which would be proportional.
3. Not facing China’s retaliatory tariffs, the US extra tariffs would have stayed at the initial level of 25% on $50 billion of Chinese products (instead of being expanded to the additional $312 billions current in effect). Although the US might find other ways to challenge China, the tension would not have escalated to the current level.

There should be no question that China would have been much better off economically without the self-inflicted woes wrought by its retaliatory tariffs. And there should be no question that the world would be much better off without the escalating trade war between the two largest economies and the looming threat of a new cold war. Furthermore, the WTO institution would not have suffered the damage from the trade war. By taking the matter in their own hands, the two largest trading powers have cooperated in undermining the multilateral system.  

III. A lesson about WTO law: The wisdom of DSU article 23

China announced its decision to retaliate on Day 1 out of indignation. China’s thinking appears to be: the US unilateral tariffs amount to an act of aggression that must be countered by equal force. Even though DSU article 23 prohibits self-help in such situation, there must be some fundamental international law principles that can override the WTO rule. Let’s hope that China will clarify what exactly these international law principles are in DS543.

The problem with this line of thinking, however, is that it ignores the underlying rationale of WTO law. To a large extent, the idea of WTO law is to protect countries from themselves. And DSU article 23 is an explicit expression of this idea:  

“When Members seek the redress of a violation of obligations or other nullification or impairment of benefits under the covered agreements... they shall have recourse to, and abide by, the rules and procedures of this Understanding.” “In such cases, Members shall not make a determination to the effect that a violation has occurred, that benefits have been nullified or impaired … except throughrecourse to dispute settlement in accordance with the rules and procedures of this Understanding….” 

By requiring WTO members not to take retaliatory action on their own, DSU 23 protects countries (i.e., their overall national welfare) from their own self-destructive trade measures. If it had followed the DSU 23 requirements, China would have maintained the moral high ground in DS543. By ignoring its obligation under DSU 23, China has done a great disservice to itself and to the rest of the world. That should be a valuable lesson for all.

On a final note, DSU article 23 only disciplines members in their reaction to the situation where their benefits under the covered agreements are nullified or impaired. It does not apply to the initial use of trade measures to address matters falling outside the covered agreements which have caused such nullification and impairment. Thus, to the extent the US is weaponizing tariffs to deal with issues such as cyber theft, foreign direct investment, and immigration, DSU 23 is of no use. How to deal with the US “aggressive unilateralism 2.0” remains a major challenge for WTO.